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Misreading Spotify’s Stock Behavior

June 17, 2018 Comments off

MARK

We live in an era of fraud in America. Not just in banking, but in government, education, religion, food, even baseball… What bothers me isn’t that fraud is not nice. Or that fraud is mean. For fifteen thousand years, fraud and short sighted thinking have never, ever worked. Not once. Eventually you get caught, things go south.

From The Big Short, screenplay by Charles Randolph and Adam McKay, based on the book by Michael Lewis

A quick aside–Billboard recently quoted the consultant Mark Mulligan as saying the following about Spotify (which is listed as a client of his MIDiA company, among others):

MIDiA Research managing director Mark Mulligan says Spotify’s general tune has changed since the company was listed on the New York Stock Exchange in April and must now aim to become profitable. “As the bellwether of streaming, Spotify has been dictating the narrative for years, but always with the focus of being a partner for rights holders. Now that it is public, Spotify has found that tough talking trumps sweet talking,” wrote Mulligan in a June 12 blog post. “Speaking from the experience of months of deep conversations with large institutional investors, Wall Street has pumped money into Spotify stock not because of how it will help labels’ businesses, but because they expect it to replace labels, or, at the very least, compete with them at scale.”

If “pumped money into Spotify’s stock” means, among other indicators, a wave of buyers, that’s one thing that Spotify’s stock does not have and so far never has had as measured by the lower chart below (see arrow):

Spot Chart 6-17

Also remember–in Spotify’s “Direct Public Offering” model, the lion’s share of Spotify stock is initially being sold by insiders with no “lockup” restrictions (which could include consultants who got compensated in shares and cash), aside from a very, very thin public float.  A thin float is not surprising for a stock that was intentionally priced out of the range of retail traders with the cooperation of the Securities and Exchange Commission.

That means that all the Spotify insiders have a strong interest in that price staying high–aside from any big blocks of shares that are being sold in dark pools, of course, which could also be an explanation for the very low reported volume.  Traders I’ve spoken to are all watching the extraordinarily low Spotify volume and high price as are some other people.  A cautionary tale for the Securities and Exchange Commission.

So I’m not really sure what “money” that “Wall Street” has “pumped” into the Spotify stock and even if they did, you should understand that money is not going to the company–it’s going to the insiders.  The company is not issuing any new shares.

That’s because the very rules of a “direct public offering” preclude an underwriting syndicate that would actually be pumping money into the stock in a full commitment underwriting of newly issued shares.  In that situation, the underwriters would be buying new shares from the company not from billionaires like Daniel Ek.

The only pumping I see going on in my opinion is spinning that there’s pumping of cash going on.  And I’ve found that kind of pumping usually precedes the dumping.

Before we mix correlation and causation, I’d like to see some confirmation in the volume for the SPOT shares–which ain’t there as far as I can tell.  The trading pattern looks a lot more like automated market making to me (which may explain the odd support level at $150).   There’s also a “head and shoulders” technical pattern if you believe in that kind of thing or if you can believe in it on low volume and early days.

Even though it’s a truism, time really will tell.  I’m not quite sure what you can tell about SPOT right now aside from asking yourself what would you sell to buy Spotify at $170?  For most retail investors, my bet is that the answer is nothing–particularly if they remember people like Mary Meeker in the Dot Bomb crash (who avoided prison and went from “laughingstock of the Internet boom” to “legendary venture capitalist” in about ten years–welcome to Silicon Valley).

And as far as “talking tough” goes, there’s lots of people who are ready to talk tough to Spotify and there’s one big difference between them and the labels.  Some of them also carry badges.

junk-bond-koenig-michael

 

 

The Return of the Fifty Dollar Handshake: Are Spotify’s Direct Artist Deals Really Less Than Meets the Eye–or Are We Looking in the Wrong Place?

June 17, 2018 Comments off

If I gave two fucks – two fucks about streaming numbers
Would have put Lemonade up on Spotify
Fuck you, fuck you, you’re cool, fuck you, I’m out (Ah!)
I ain’t never seen a ceiling in my whole life, that’s word to Blue
Freestyling live, blueprint from my Jigga who never bribes

From Nice performed by The Carters

I guess Beyoncé & Jay-Z didn’t get the memo: Spotify is pumping up the earned media about its “direct artist deals” and also trying to pump up the bizarre behavior of its low volume stock price (and that story has yet to be told but is for another day).  But the question is why would managers go through the headaches if there wasn’t more to it–like playlist placement, for example.  Think about it–if Spotify said here’s some cash and we’ll give you a better split if anyone plays your tracks, is that as enticing a story as if they also said they’d guarantee placement on key playlists?

If a terrestrial radio station did that, my bet is that would be an…uh…a whatchamacallit.  A crime.  In most if not all states, undisclosed payments for placement would very likely violate consumer fraud statutes.  So we’re way past antitrust now, boys and girls.  Fifty state attorneys general knocking on your door can ruin your whole day.

Radio payola is often referred to as “the fifty dollar handshake”–when a radio promoter would slip a $50 bill to a DJ during a handshake.  If it’s illegal on terrestrial radio, why should it be legal online?  I’m a big believer in platform parity and a level playing field, don’t you know.  Also known as Moondog’s Revenge.

As the erudite David Oxenford noted a few years ago:

The payola statute, 47 USC Section 508, applies to radio stations and their employees, so by its terms it does not apply to Internet radio (at least to the extent that Internet Radio is not transmitted by radio waves…But that does not end the inquiry.  Note that neither the prosecutions brought by Eliot Spitzer in New York state a few years ago nor the prosecution of legendary disc jockey Alan Fried in the 1950s were brought under the payola statute.  Instead, both were based on state law commercial bribery statutes on the theory that improper payments were being received for a commercial advantage.  Such statutes are in no way limited to radio, but can apply to any business.  Thus, Internet radio stations would need to be concerned.

Let’s look at two questions:  Payment for playlist placement and potential infringement of song copyrights in a post-Music Modernization Act world.

Here’s a summary of financial terms of these deals from Billboard:

Over the past year, sources say, Spotify has been offering to pay a number of artist-management firms several-hundred-thousand-dollar advances in exchange for licensing their acts’ music directly to its streaming services. These deals cut out record labels and independent distributors, yielding more revenue per stream for Spotify, the musicians and their managers. Since Billboard reported the terms of some of these offers on June 6, Spotify’s stock has climbed more than 8 percent, to about $178 per share, as of its June 14 close….

Some acts say they are tempted to sign direct deals with Spotify not just for the advance fee and the higher potential payouts per stream, but for the prospect of better placement on top playlists — key real estate that some managers say has become increasingly difficult to score.

Now why would the “prospect of better placement” be a factor?  More likely the guarantee of “better” placement–in terms of both the playlist and the ranking on that playlist?  And this makes the stock market “cheer” as opposed to run for the exits?

Remember that Spotify is reportedly making deals with “artist management firms” to license directly to Spotify in a way that “cuts out record labels and independent distributors”.  That also tells you that it is unlikely that any of these artists are already signed to either a major or to a digital distributor or else there’d be no one to “cut out.” Of course if they aren’t signed then no one is actually being cut out, they’re just being denied an opportunity.

So that means that either the manager has already negotiated an out in their indie distribution deal that would allow them to take the $50 handshake…sorry, the Spotify money…or their participating artists don’t have a distribution deal yet.

The manager then shops the artist to a distributor who apparently has to take subject to the Spotify carve out.  This will not be attractive to a digitial distributor who works on a distribution fee basis, and may not even be attractive to a Tunecore that puts all the distribution risk on the artist through up front fees with no risk to Tunecore.  This is perhaps because the Tunecore fees appear to be based on amortizing collection fees against the pass through float and the float will be much lower without Spotify.  This is particularly true now that streaming has destroyed the download business.

Coming to digital distributors without Spotify in 2018 is probably like coming to them without iTunes in 2008–not attractive.  But as Billboard notes, the people who really get hosed by Spotify are–predictably–the indie labels.  This will be particularly true even if the manager was able to negotiate a buyout from the Spotify deal if the artist has an opportunity to sign to a label.

So once again, a tone-deaf Spotify steps in it because they just can’t leave well enough alone.   And they are very likely selling the deals to managers and artists based on payola-style playlist placement that benefits “their” artists on Spotify’s own playlists and the consumer is none the wiser.

I haven’t seen these agreements in the flesh, but I would also bet there is another clause in there–song clearance.  Spotify is very likely putting the song clearance onto the artists so that they get fully cleared recordings delivered to them.   Understandable given Spotify’s abysmal track record on screwing songwriters, but is it realistic?

Maybe.  As long as the artist has written one hundred percent of the songs recorded–which means no publishers, no covers, no outside writers and no samples–the artist can promise to deliver fully cleared recordings including the songs.

How likely is that to happen?

Now uncleared songwriters–before you call your lawyers, remember that after the Music Modernization Act you can’t sue Spotify for statutory damages and attorneys fees for copyright infringement if you didn’t already bring your case before January 1, 2018–even if you didn’t know you had a case.

So assuming MMA becomes law later this year, you’ll have to find something else to sue for, and good luck with those attorneys fees.  Thanks, Congress.

So maybe we all have our eyes on the wrong ball.  We expect that from Spotify, but the managers can do better.

And then there’s state law prosecutions for commercial bribery.  Helloooo state attorneys general.  Not to mention federal mail and wire fraud and, of course, RICO.  No safe harbor for Danny on the RICO.

How are those copyright infringement lawsuits looking now?

 

Spotify’s Latest Wrong Turn: Direct Licenses With Managers for Rights They Don’t Control

June 10, 2018 1 comment

Billboard reports that Spotify’s latest and greatest is paying a minimum guarantee (aka an advance against royalties) for direct deals for artists:

Under the terms of some of the deals, management firms can receive several hundred thousand dollars as an advance fee for agreeing to license a certain number of tracks by their independent acts directly to Spotify.

That is an odd sentence for a number of reasons.

Management Agreement:  Crucially, managers typically do not (or should not) own the rights to either songs or recordings created by their artist clients.  They also typically do not (and should not) have the right to sign license agreements in the name of their artist clients.

Both these points are usually the subject of some agita in the negotiation of management agreements.  Smart managers want nothing to do with signing agreements or cashing checks in the name of their clients.  If you look at some of the prominent artist-manager disputes over the years, they almost always revolve around some version of this story (see Richard Pryor, Billy Joel, Amy Lee).

I also find it hard to believe that the artist’s lawyer would allow the client to get into one of these situations if the lawyer knew about it.

If a manager is receiving “several hundred thousand dollars” there’s also the question of double dipping or other conflict of interest if the manager is also commissioning the advance and perhaps royalties after a theoretical recoupment point.  Again, smart managers usually stay away from this kind of thing.  If you try hard enough, payments like this can look like an umm…uh…a whatchamacallit.  A bribe.

Cross-Recoupment:  Let’s say that Spotify somehow gets around these wrinkles in the management agreement, there’s a simple question of calculating recoupment since the advance will be recouped from different artists at different rates.  Let’s say that Manager X signs artists A, B and C to this arrangement, and allocates an equal portion of the advance to each artist (after commissions).  Then the algorithmically fortunate Artist C lucks out and gets into the super-popular Men of Rock playlist and recoups Artist C’s share of the allocated advance.   Artists A and B are not so lucky and are unrecouped.

Artist C will be payable, but Spotify will say not so fast…your manager is unrecouped so no cheese for you.  How is that going to go over if Artist C cares about the $0.0003 per stream?

Or what if Artist C is so algorithmically blessed that they recoup the entire advance to A, B, C and the manager’s commission.  Since Artist C only got their allocated share of the advance, Artist C’s earnings applied to Artist A and B are actually payable royalties to Artist C (as the earned royalties exceed the advance paid to C.)  Spotify will say, sorry, no cheese for you, go to your manager we already paid.  How is that going to go over?

Pre-Existing Distribution Agreements:  If an artist distributes through an indie (either digital only or full service) the artist has already given away the rights that Spotify purports to license from the manager.  Pulling tracks out of that distribution agreement is probably a breach of the exclusivity clause, particularly if the distributor already paid an advance for the recordings.

That may sound like intentional interference in a contract–but of course Spotify’s deal is with the manager, not the artist, and any distribution agreement will likely not be with the manager but with the artist.  So Spotify probably has no provable knowledge of the distribution agreement.

Future Term Recording Artist Agreements:  If Artist C gets an offer to sign to a major label during the term of this Spotify license, the label is probably going to expect these “prior masters” to be included in their deal.  No matter how impressive the algorithms, there are some basic deal points to satisfy, and the label is going to expect to see those streams show up on their account.  This can be solved pretty easily as long as no one gets greedy–the label simply buys out the unrecouped balance.

But–Spotify doesn’t have to agree to those terms and may not.  Artist C may never have had a chance to negotiate such a clause in “their deal” because the manager–who was supposed to be looking out for their client–may have “forgotten” to raise the point with Spotify and the artist is not under contract with Spotify.

If the artist is also simultaneously firing their manager as they sign with the major (which certainly has been known to happen), the manager may not be too terribly inclined to modify the terms of the manager’s deal with Spotify after the fact.

Yes, it’s sheer genius from the Spotify A&R Department (does that stand for “Algorithms and Redirects”?).

Again.

Must-Read by @LizPelly: Discover Weakly: Sexism on Spotify

June 8, 2018 Comments off

De6lz41WkAA6SNa.jpg-large

Liz Pelly demonstrates how Spotify perpetuates gender stereotypes.  Spotify–where A&R stands for “Algorithms and Redirects .” Why are we helping these people again?

“Spotify has actively steered its listeners away from the album as a format and toward playlists. This serves Spotify’s interests: a music culture dependent on playlists is dependent on Spotify, whereas a music culture dependent on albums is dependent on record labels. As Spotify vies to become more powerful and influential than labels, emerging as the music industry’s new center of power, one of its primary strategic focuses has been on playlists—curated by humans, algorithms, and sometimes a hybrid approach—making the process of navigating its platform more convenient and ever more personalized.

As a result, Spotify’s most popular playlists have emerged with outsize influence. After I created a new Spotify account earlier this year for this very listening experiment, when I clicked the “albums” tab on my brand-new account, Spotify responded, “Your favorite albums will appear here,” followed by, tellingly, “Go to your Browse page to find amazing playlists for every mood and moment.” A small but powerful gesture: at every turn the platform encourages playlists over albums. This, of course, raises several concerns regarding how fans relate to music and even this music’s context. Which is all to say: in the realm of Spotify, playlist placement matters. A lot.”

Read the post on The Baffler (h/t Artist Rights Watch)

Music Biz Weekly Podcast: Are Streaming Services A Level Playing Field for Artists? @MichaelSB and @JayGilbert talk to @ChrisRizik on @musicbizpodcast

June 1, 2018 Comments off

An excellent discussion of the “ethical pool” royalty approach for streaming services to properly compensate artists who send fans to a streamer.

 

Read Chris Rizik’s important post “How Spotify Is Killing Jazz, Soul, Classical Music

@agraham999: ‘BIG DATA IS ABOUT TO BECOME A VERY BIG PROBLEM FOR THE MUSIC INDUSTRY.’ — Artist Rights Watch

May 14, 2018 Comments off

One of the big pitches we have heard for years from digital services is how they can provide artists with data resources to connect with fans.  That is–everything except a meaningful way to connect with the fans that the artist isn’t already driving to the service in the first place.

Of course, the most laughable part of this pitch is that somehow knowing you’ve been streamed in Shoreditch, Tyler, Yellowknife and Brooklyn is going to be meaningful to a talent buyer, even if that talent buyer books in those towns.  Yet we frequently see journalists dutifully spout this received wisdom as if it meant something other than trying to gin up a reason to pay artists and songwriters a still lower royalty to offset the cost of rent at World Trade Center.

Alan Graham’s recent post in Music Business Worldwide has put his finger right on another problem that defies the conventional wisdom and Spotify narrative–big data ain’t all it’s cracked up to be and may be going the way of Cambridge Analytica.

Big data was a solution pitched and sold to the music industry as a panacea to fan engagement problems. While big data seems very attractive, using personal data and profiling fans may in fact turn out to be, like oil and plastics, already outdated and toxic….

In a 2014 New Yorker article, Spotify was keenly aware of the power of such data:

All this, Ek explained, will help Spotify to better program the “moments” of a user’s day. “We’re not in the music space—we’re in the moment space,” he told me. The idea is to use song analytics and user data to help both human and A.I. curators select the right songs for certain activities or moods, and build playlists for those moments. Playlists can be customized according to an individual user’s “taste profile.” You just broke up with your boyfriend, you’re in a bad mood, and Justin Timberlake’s “Cry Me a River,” from the “Better Off Without You” playlist, starts. Are you playing the music, or is the music playing you?

…In fact, when you agree to use Spotify, third-parties who install the Spotify widgets on their sites may also send data as to which page on what site you are visiting.

With this knowledge, just how comfortable are you knowing that Facebook is now contextualizing your private chat messages to suggest music on Spotify?

via @agraham999: ‘BIG DATA IS ABOUT TO BECOME A VERY BIG PROBLEM FOR THE MUSIC INDUSTRY.’ 

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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