@musictechsolve: Do Spotify Stock Downgrades Go Far Enough?

On June 24th, Spotify shares (ticker: SPOT) was downgraded by Evercore analyst Kevin Rippey, who cut the stock to Underperform from In Line.  Since then, analysts are steadily looking past the loss-making Spotify’s $1 billion stock buy back plan.

Rippey says investors are overestimating Spotify’s ability to make money from podcasts and offering services to musicians and are underestimating the competition from other streaming services—particularly in countries outside the U.S. He reduced his price target to $110.

As ARW readers will recall, I have long challenged Spotify’s kvetching about high royalty rates by pointing to the its high overhead, 7 figure performance bonuses to Daniel Ek when he failed to meet the bonus criteria, and other irresponsible behavior by the board that Ek controls.

Spotify’s interest in podcasts is another comical example of Ek as the Easter Bunny of Screw Ups.  He bought a podcasting company that was unionized.  Sheer genius.  Why did he buy them?  Some people think it’s because podcasts were another form of user-generated content where people work for free in exchange for hot meals…no, in exchange for exposure bucks.

Exposure Bucks

Apple is busy paying for podcasts according to Newsmax:

Apple Inc. plans to fund original podcasts that would be exclusive to its audio service, according to people familiar with the matter, increasing its investment in the industry to keep competitors Spotify and Stitcher at bay.

Executives at the company have reached out to media companies and their representatives to discuss buying exclusive rights to podcasts, according to the people, who asked not to be identified because the conversations are preliminary. Apple has yet to outline a clear strategy, but has said it plans to pursue the kind of deals it didn’t make before.

Apple all but invented the podcasting business with the creation of a network that collects thousands of podcasts from across the internet in a feed on people’s phones, smartwatches and computers. The Apple Podcast app still accounts for anywhere from 50% to 70% of listening for most podcasts, according to industry executives.

So Spotify’s law fare against Apple in Europe should come as no surprise (for more on that subject see the “Spotify Untold” corporate bio book).  What this comes down to is that once again, Apple understands its audience and what would delight them where Spotify wants to build them a faster horse (or at least a cheaper one).

Meanwhile, Spotify is commoditizing music into a “playlist friendly” environment based on your mood rather than being artist driven.  Why?  One possible reason is the psychographic research of Michael Kosinski, whose work formed the basis for techniques honed by Cambridge Analytica and the Internet Research Agency you hear so much about (although it must be said the Kosinski did not work for either of those outfits–no he works as a professor at…you guessed it…Stanford).  See his paper The Song Is You: Preferences for Musical  Attribute Dimensions Reflect Personality, available at the Leland Stanford Google University Business School.

The more insightful analysts are represented by Mr. Rippey, who seems to have a good grasp on Spotify’s business and sees through all the bright and shiny objects they want you to focus on as reported by Barrons (emphasis mine):

Rippey says Wall Street’s expectations assume that either the company will come out way ahead in negotiations with the music labels that control the vast majority of the content that Spotify streams, or that it will make a bundle of money from services that previously accounted for almost none of its income.

Now that the sugar high of the Spotify stock has passed through the system and artists either are happy or not happy with their share of the proceeds–which will be hitting royalty statements right about September 30–labels are now faced with a  second act, and that second act likely will require a bigger royalty check–not a smaller one.

To achieve Wall Street’s targets for gross profit, Spotify would either need to take a larger cut of proceeds from each song stream [also called a lower royalty to artists and songwriters] or generate as much as $650 million from “ancillary” areas like Spotify for Artists and podcasts by 2022—areas the company doesn’t make much money on today, Rippey says. Spotify for Artists offers data for musicians to track which songs are performing well and in which areas, among other benefits. [Which is OK if Spotify for Artists is free, I guess–since we sent them the fans–but my bet is that no one is going to pay for it, certainly no one with a modicum of leverage.]  Spotify makes money from ads on podcasts it owns and has also begun to launch exclusive podcasts that listeners can only get on Spotify.  [Spotify has never had a hit that originated entirely within Spotify.  When it does, check this space.]

Given that music crosses over multiple cultures but that Spotify brings a decidedly European and Anglo/American creative viewpoint to its distribution platform, it is unlikely to be able to fight all fights in all markets and be all things to all music fans in the some 60 countries it operates in.  This is particularly true in countries that actually value their culture and creators.

Spotify is the global leader in streaming music, but Rippey thinks that Wall Street overestimates the company’s power in local markets. “In emerging markets like India, local players dominate the market,” he writes, noting that Jio and Gaana were the market leaders there in the first quarter. “This fragmentation leads to an understatement of how competitive streaming music is globally.” Similar dynamics play out in countries like Indonesia too.

Those are some good concrete reasons why Rippey’s price target is $110, which I think is still about $50 too high because of Spotify’s C team management.  And also because the other analysts are all guiding too high in the Overton Window:

Analyst Rating Price Target
Evercore/Kevin Rippey Underperform (From In Line) $110
Nomura Instanet/M. Kelly Buy $190
Stifel/John Egbert Buy $175
Credit Suisse/B. Russo Underperform $120
BOA/Jessica Reif Ehrlich Buy $230

One major factor that all the analysts overlook, like they missed the subprime crisis, is buried in the commentary that never gets picked up in the Wall Street publications–the fact that artists can’t begin to make a living from streaming the way they could from the CDs that streaming is replacing.  This sudden contraction hurts artists at all stages of development.  To put it in terms that Wall Street might understand more readily, this is a supply chain issue.  The chain will have no supply if unsustainable economics expands which it seems like it will.

There’s about 5% of the tracks that make 90% of the revenue from Spotify-type streamers.  Fans are paying subscriptions every month for music they don’t listen to performed by artists they don’t like.  When that idea starts to permeate the Federal Trade Commission and the Department of Justice, who knows what may happen.  This will be true of podcasters, too–the unionized podcasters affiliated with the Writers Guild of America.  I’m looking forward to that collective bargaining experience.

But for now, it’s only a matter of time before artists who are not in that 5% start to jump ship.  Analysts should be asking, who can encourage them to jump and what will happen to the ship they jump from if there were some disruption below decks in the royalty rates?

@rmilneNordic: Spotify chief wins backing of business families for ‘creative Davos’

Just what we need, Spotify staging another fake songwriter “genius” event now that we made him even richer.  Make you feel better about the reaming we got on MMA?

The chief executive of Spotify is teaming up with some of Europe’s leading business families to finance an annual conference they hope could be a “creative Davos” with a focus on technology and innovation. Brilliant Minds, an event set up by Daniel Ek of music streaming company Spotify and Ash Pournouri, the ex-manager of the recently deceased DJ Avicii, is now owned and financed by a group of Swedish families including the Wallenbergs, Stenbecks and Olssons, whose companies include Ericsson, Electrolux, Kinnevik, Zalando and Stena.

Read the post on the Financial Times

@FeaturedArtist’s Lucie Caswell calls for “due reward” to artists from Spotify equity windfalls

[And what about the songwriters?]

As the trading floor eyes up Spotify’s float, the attention of the music industry is on its licensors. None more so than music makers, who created the assets which make Spotify and its rivals, the billion-dollar businesses they are today. In theory, those assets are due for a windfall as option agreements become exercisable and paper value crystallises into cash. This is potentially a moment which proves the extraordinary opportunities of our digital age, the borderless, boundless bounty of music, the leadership of music innovation and, the enormous value in this business we love, music.

Whose value and how much however, is the conversation of the day. Spotify floating as the New York Stock Exchange takes a hit, is hopefully not prescient of the rewards to the music value chain, through rights-owners and rights licensors who included equity in their licensing deals. Premium-priced initial sales would suggest otherwise. Those licensing deals intrinsically exist for the protection and monetisation of copyright – the music rights and songs artists entrusted to those licensors, for the best advantage to achieve fans and revenues. Rights-holders, distributors, aggregators and services like Spotify, all make money from that transaction and, that trust. Surely it is only sound business that the trust will be repaid and the creators receive due reward from those valuable assets, when money is made.  Whether marketing them, streaming them, building a business upon and around them or licensing them, this industry is sustained and sustainable only, with those songs and recordings.

How much value, will be a matter of the deal at hand and the hour at which the licensor cashes in (something which it seems, will be a tightrope dance of timing over the initial roller-coaster period of trading). From that point, the licensor must decide how to distribute the win across all of the assets it has licensed. Notice I say all. There is apparently some discussion of who should be included, of what repertoire may or may not feel the windfall and who is more valuable.

At this stage we point, as we have before, to the demonstrative WIN FairDigitalDeals Declaration. This landmark calling-card for fair play by rights-holders has come of age. Principle statements are now to become practice. This simple document, signed up to by a growing, global swathe of independent labels, is indicative of how good practice is the fair, transparent and creator-led business we strive for as the FAC.  Good players are many but they also provide precedent that business can be done with equal revenue shares, clear reporting and by fit for purpose, full and fair distribution of wealth to those who create it. Now is the time for all labels and licensors to really demonstrate good intent for artists, ensuring that our ecosystem is sustainable in practice and principled throughout.

Read the post in Music Week

Barf. Just Barf. — The Trichordist

[Editor Charlie sez:  The Music Modernization Act really is the Spotify IPO Preservation Act, as we suspected!]

David Israelite of the NMPA and Mitch Glazier of the RIAA have penned an op-ed for Variety Magazine, in which they extoll the virtues of various copyright reform proposals before congress. While I agree with them about the Classics Act (fixes pre-1972 loophole) AMP act (helps producers/engineers receive royalties from digital royalty streams) every day […]

via Barf. Just Barf. — The Trichordist

@musicbizworld: THE GREAT BIG SPOTIFY SCAM: DID A BULGARIAN PLAYLISTER SWINDLE THEIR WAY TO A FORTUNE ON STREAMING SERVICE?

[Tim Ingham tells a story of a Spotify royalty scam run by a “Bulgarian playlister” (…stop right there and go no further…who was running what are obviously scam playlists of snippets by manipulating Spotify subscription accounts.  As Tim notes, the fact that the “Bulgarian playlister” was able to manipulate a large number of “paying” subscription accounts, raises yet more important questions about Spotify’s subscriber numbers.  This is obviously of vital importance to potential buyers of Spotify’s stock–what subscriber numbers are real.  Perhaps the Securities and Exchange Commission will question the man behind the curtain.]

A Bulgarian playlist-maker scammed the Spotify payout system for months last year – and could well have made themselves a millionaire off Daniel Ek’s platform.

That’s the shock claim being made by multiple high-level industry sources to MBW this week.

Music Business Worldwide can today reveal details of the alleged shakedown, which reached its height at the end of last summer.

The evidence we’ve gathered strongly suggests that one party sucked a vast amount of money – as much as $1 million-plus – out of the Spotify royalty pool, and away from legitimate artists and labels.

And the best/worst part of all? They probably didn’t break any laws in the process….

Spotify tells us it’s now “improving methods of detection and removal”. But the big question remains: are the scammers out there improving their methods too?

Are there others, like our Bulgarian friend, purchasing multiple premium Spotify accounts and rinsing playlists stuffed with cheap music to which they own the rights?

If so, how many of these Spotify scammers exist – and how much money are they generating?

Are they operating at a lower commercial level than The Bulgarian and, therefore, not outing themselves by appearing on weekly top global playlist charts?

Crucially: what does all of this mean for the solidity of valuations for music’s biggest companies?

And even more crucially… what does it mean for the veracity of Spotify’s paying audience as the company begins its high-stakes escalation towards the New York Stock Exchange?

Read the post on Music Business Worldwide

 

@Maureenmfarrell: Private Trades in Spotify Shares to Play Key Role in Upcoming Debut

[Recall that Spotify is not doing a traditional IPO, but something called a “direct listing.”  The difference between the two is a bit down in the weeds, but is crucial.  In a traditional IPO (sometimes called a “full commitment underwriting”) a group of investment banks or the equivalent form an “underwriting syndicate” that buys new shares from the company at a valuation set by the underwriters.  Hence the “pricing” concept for IPOs–you will hear that right before a new company starts trading.  If the path to an IPO has been managed correctly, the underwriters’ valuation is higher than the last private valuation of the company’s last sale of its preferred shares to private investors.

The underwriters want to price in a range that they can resell to retail investors, so they wouldn’t ever price at $1,000 for a stock that is to sell in the open market.  Think about it–how long did it take Amazon and Google to get to $1,000 in the open market?  They didn’t start there.

Another reason–which I suspect is the true reason–that Spotify is not going the underwritten IPO route is because they can’t get the valuation they want.  This may have something to do with another aspect I believe to be true–Spotify is not cracked up to be a public company.

Chris O’Brien in Venture Beat has a really insightful post on Spotify’s problems with valuations:

The reality is that by taking this route Spotify is pursuing a risky strategy. And it’s likely only doing so because it was backed into a corner by its investors and by private fundraising that led to a dangerously high valuation of $19 billion.

“This is not a story of problems in the IPO market,” according to Kathleen Smith, a principal at Renaissance Capital and manager of IPO ETFs. “It’s a problem with Spotify’s valuation.”

So let’s be honest–the reason why Spotify wants to trade publicly has a lot more to do with Daniel Ek’s misplaced ego than it does with any intrinsic value of his company.   And don’t forget–when the dust settles, it is his company and this was his idea.  Genius or goat, he will get the credit.

But of course Spotify’s “public or bust” approach is really designed to allow existing stockholders to cash out.  And here’s the twist–if you’re going to sell, someone has to buy.  And if you don’t have underwriters standing behind a price point, then there is no floor to the stock price if the sellers start running for the exits.

So–Spotify is trying to look to existing private market sales–very limited and nothing like public market sales–for guidance on its stock price.  (Private markets are sometimes called “secondary markets” where you can buy private company shares.)  Maureen Farrell in The Wall Street Journal has some reporting on this which is both murky and enlightening coverage of who Spotify is “managing” (some might say “manipulating”) its stock price already.  And if you wonder what running for the exits looks like, check out the VIX crash.]

Spotify AB is counting on its surging private-market value to bolster the music-streaming service’s appeal to investors in an unorthodox public debut that could be the biggest since SnapInc.’s $20 billion IPO last year.

The listing, expected as soon as the end of March, isn’t an initial public offering, in which underwriters set a price and place shares with chosen investors before trading. Instead, the Swedish company will simply float the shares on the New York Stock Exchange and let the market find a price, in what is known as a direct listing.

While Spotify and its advisers are still determining how exactly the process will work, the company and its banks are expected to have a role in helping guide the market to a price and connecting buyers and sellers initially, people familiar with the matter said. A suggested price range is expected to be relayed to the market before trading starts, but the price will ultimately be set by what buyers are willing to pay and the price at which sellers part with their shares.

Private trading is expected to be a key part of the company’s effort to guide the market to a price, people familiar with the matter said.

The so-called secondary markets in private technology stocks are typically an afterthought in an IPO, in part because trading tends to be thin and not always a reliable indicator of value. But Spotify and its advisers at Goldman Sachs GroupInc.,Morgan Stanley and Allen & Co. are closely watching trades among private investors and have taken steps to spur volume, the people said. The company recently informed existing investors that it waived its right to buy shares before they are offered to others.

Read the post on the Wall Street Journal