@EustanceHuang: Evergrande collapse could have a ‘domino effect’ on China’s property sector, AllianceBernstein says

[Editor Charlie sez: Dow Jones dropped 800 points during trading yesterday on news of what could be China’s Lehman Brothers financial contagion, 2008-style–Holy pangolins, Batman! Don’t believe every dead cat bounce. If you didn’t notice that 800 point drop yesterday, this analyst has some sobering news highlighting the need to index all songwriter royalties to rise with inflation.]

China’s “highly distressed” real estate companies are at risk of collapse as the country’s highly indebted developer Evergrande is on the brink of default, warns AllianceBernstein’s Jenny Zeng.

Speaking with CNBC’s “Street Signs Asia” on Friday, the co-head of Asia fixed income at AllianceBernstein warned of a “domino effect” from a potential Evergrande collapse.

“In the offshore dollar market, there is a considerable large portion of developers (who) are implied to be highly distressed,” Zeng said. These developers “can’t survive much longer” if the refinancing channel remains shut for a prolonged period, she added.

@digitalmusicnws: @Portisheadinfo Says SoundCloud’s ‘Fan-Powered’ Royalty System Has Boosted Their Payments by 500%

Back in March, SoundCloud introduced “fan-powered royalties,” or direct-to-artist payments based upon actual user engagement. Now, a track that Bristol’s Portishead released exclusively on SoundCloud in July has reportedly generated over six times the royalties that it would have made on streaming services with a pro-rata model in place.

Read the post on Digital Music News

George Soros: Investors in Xi’s China face a rude awakening

[ARW readers could probably guess that I’m not a fan of George Soros–a man who for reasons of his own has financed most of the anti-artist front groups around the world. But when he’s right, he’s right and in this op-ed from the Financial Times, he’s definitely right and Blackrock is definitely wrong.]

The crackdown by the Chinese government is real. Unnoticed by the financial markets, the Chinese government quietly took a stake and a board seat in TikTok owner ByteDance in April. The move gives Beijing one seat on a three-person board of directors and first-hand access to the inner workings of a company that has one of the world’s largest troves of personal data. 

The market is more aware that the Chinese government is taking influential stakes in Alibaba and its subsidiaries.  Xi does not understand how markets operate. As a consequence, the sell-off was allowed to go too far. It began to hurt China’s objectives in the world.

Recognising this, Chinese financial authorities have gone out of their way to reassure foreign investors and markets have responded with a powerful rally. But that is a deception. Xi regards all Chinese companies as instruments of a one-party state. Investors buying into the rally are facing a rude awakening. That includes not only those investors who are conscious of what they are doing, but also a much larger number of people who have exposure via pension funds and other retirement savings. 

Read the post in the Financial Times

It’s All About the Stock: Tone deaf Spotify Insiders Vote for Stock Buyback to Juice Their Share Price While Congress Questions Streaming Payola

Spotify announced a second billion dollar stock buy back last week which means they have $1 billion in free cash that they will spend, not for paying artists, not for paying songwriters, but to juice their stock price and make Spotify insiders and senior employees richer still. Remember that Spotify already did this once before in the pre-pandemic. Just like they lavish the artists’ money on their fancy World Trade Center offices and buying the Arsenal Football Club, a second billion dollar stock buy back means more of the same while they pay artists a pittance, songwriters even less and session performers not at all.

Every Spotify employee should understand that the income disparity between their monopoly business practices and the creators who drive the fans to their platform that Spotify monetizes out the back door has never been so dire.

Why do you care? A few reasons. First, it demonstrates that Spotify has plenty of cash laying around despite its continued loss making–which confirms the “get big fast” and devil take the hindmost strategy that has driven the company to make its insiders extraordinarily rich. So when Spotify tell you (and the UK Parliament) that they can’t pay a fair royalty because they’re struggling so much, here’s more evidence that those claims really are as much bunk as they sound like.

Second, it highlights the value transfer from featured artists who barely get paid at all and non-featured artists who really don’t get paid at all. The real value to the music that Spotify pays at a hundredths of a penny is reflected in the share price and market value, not the revenue which they refuse to increase as they pursue their growth strategy. This failure to allow the creators that make their company to capture value through higher royalties is the subject of a study I co-wrote for the World Intellectual Property Organization and is underlying the Spotify royalty crisis.

But perhaps most importantly it’s yet another tone deaf move by Spotify that ignores both the Congressional payola inquiry into Spotify’s business practices as well as the streaming income inequality that’s argued every day as the walls close in on songwriters trying to make a living and artists trying to tour in a life threatening environment. As Senators Bernie Sanders and Chuck Schumer wrote in a New York Times op-ed, stock buybacks should not come at the expense of workers, which I would argue includes artists and songwriters in Spotify’s case. For a deeper dive, see Profits Without Prosperity by the economist William Lazonick in the Harvard Business Review.

Professor Lazonick tells us:

Though corporate profits are high, and the stock market is booming, most Americans are not sharing in the economic recovery. While the top 0.1% of income recipients reap almost all the income gains, good jobs keep disappearing, and new ones tend to be insecure and underpaid.

One of the major causes: Instead of investing their profits in growth opportunities, corporations are using them for stock repurchases. Take the 449 firms in the S&P 500 that were publicly listed from 2003 through 2012. During that period, they used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock. Dividends absorbed an extra 37% of their earnings. That left little to fund productive capabilities or better incomes for workers.

Why are such massive resources dedicated to stock buybacks? Because stock-based instruments make up the majority of executives’ pay, and buybacks drive up short-term stock prices. 

Here’s the Spotify press release:

Spotify Technology S.A. (NYSE: SPOT) (the “Company”) today announced that it will commence a stock repurchase program beginning in the third quarter of 2021. Repurchases of up to 10,000,000 of the Company’s ordinary shares have been authorized by the Company’s general meeting of shareholders, and the Board of Directors approved such repurchases up to the amount of $1.0 billion. The authorization to repurchase will expire on April 21, 2026. The timing and actual number of shares repurchased will depend on a variety of factors, including price, general business and market conditions, and alternative investment opportunities. The repurchase program will be executed consistent with the Company’s capital allocation strategy, which will continue to prioritize aggressive investments to grow the business.

“This announcement demonstrates our confidence in Spotify’s business and the growth opportunities we see over the long term,” said Paul Vogel, Chief Financial Officer at Spotify. “We believe this is an attractive use of capital, and based on the strength of our balance sheet, we continue to see ample opportunity to invest and grow our business.”

Under the repurchase program, repurchases can be made from time to time using a variety of methods, including open market purchases, all in compliance with the rules of the United States Securities and Exchange Commission and other applicable legal requirements.

The repurchase program does not obligate the Company to acquire any particular amount of ordinary shares, and the repurchase program may be suspended or discontinued at any time at the Company’s discretion.

What are they not telling you? Well, first of all I’m not so sure how strong the Spotify balance sheet really is, with all due respect to Mr. Vogel (who is no doubt pitching a stock buyback that he probably personally benefits from as a shareholder). Without grinding through details, let’s say that Spotify’s stock is down 30% from its COVID-induced highs so there’s that. Someone else seems to think the balance sheet isn’t all that.

Why do I say that Spotify’s stock buy back juices the share price and earnings per share? It’s simple–you keep the financial metrics like revenue and earnings separate and constant. The share price and earnings per share is a function of market capitalization, a ratio based on the number of shares outstanding. And here’s the key: By reducing the number of outstanding shares alone, you can increase the stock price and the earnings per share without actually changing anything about the company’s financial performance (kind of like a reverse stock split).

Stock repurchases are usually funded through hitting an account called “retained earnings” and buying the shares in the open market at a fixed price, sometimes through a tender offer. If there is insufficient retained earnings, the company can take on debt. Spotify doesn’t mention in its press release exactly how this particular buyback will be financed, but it’s usually one or the other, and otherwise in compliance with the SEC Rule 10b-18 safe harbor for issue repurchases for those reading along at home.

The key takeaways:

  1. Spotify is a monopolist and has plenty of money
  2. Spotify is doing a stock repurchase to juice the share price and make it look higher than it is, fooling no one on Wall Street
  3. The major beneficiaries are Spotify insiders like Daniel Ek who control the company, the board and all shareholder votes.
  4. Spotify have the money to compensate featured artists, nonfeatured performers (musicians and vocalists) and songwriters but choose to spend it on themselves.

Results of ARW Songwriter Mechanical Royalty Income Questionnaire

We hosted a questionnaire to elicit responses from songwriters during June and July on the sources of their income particularly regarding physical and downloads. We got some interesting responses and many thanks to all those who participated!

You can read the entire anonymized responses here, but there were a couple of responses to call attention to: