[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.
The Chinese government ordered its TV broadcasters to “put an end to sissy men and other abnormal esthetics,” its TV regulator said, as China’s Communist Party cracks down on its society for a “national rejuvenation” ordered by President Xi Jinping, the Associated Press reported.
China’s TV regulator insultingly addressed effeminate men with the slang term “niang pao” meaning “girlie guns.” The order to “put an end” to them demonstrates the Chinese government’s worries that male pop stars provide a lack of masculine influence for the nation’s men. Meanwhile, in nearby Japan and South Korea, many male pop stars are known for having a sleek and feminine image.
In addition, broadcasters were ordered to not promote “vulgar internet celebrities” alongside celebrity culture and that broadcasters should “vigorously promote excellent Chinese traditional culture, revolutionary culture and advanced socialist culture.”
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.
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:
Spotify is a monopolist and has plenty of money
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
The major beneficiaries are Spotify insiders like Daniel Ek who control the company, the board and all shareholder votes.
Spotify have the money to compensate featured artists, nonfeatured performers (musicians and vocalists) and songwriters but choose to spend it on themselves.
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:
Remember record clubs? 20 CDs by hit artists for 1¢? These were the absurd organizations run by some of the smarmiest of the smarmy in our business that could not wait to get their greedy paws on your records by your artist who you busted your hump to help find an audience, often at the peak of their popularity. Front line labels were under tremendous pressure to hand over our precious cargo to them at the earliest opportunity so the clubs, too, could snarf up the hit gravy train while giving the artists and especially the songwriter a truly raw deal.
Thus arose the “club holdback” a contractual provision that required a fixed period of time to pass before the record went to the club abattoir. The standard give was 90 days from LP release, but that really wasn’t long enough. It takes time to find an audience and 90 days isn’t nearly long enough. So true to form, successful artists or competitive signings could get a longer holdback, sometimes as long as 12 months. Another trick was that at least one of the clubs refused to pay full statutory or even the full 3/4 rate, so the tricksie label lawyer could also get rid of the 3/4 of 3/4 rate that the clubs would expect you to get because that was forever. Extend that holdback to 12 months and eliminate the reduced rate mechanical, and you could legitimately say “wish I could help, but you know, the contract. We fought like dogs and I had to give them something…so I gave them your money.”
As any artist or particularly nonfeatured artist (aka session player) will tell you, streaming cannibalizes higher margin physical sales. That’s a fact. Streaming also throws off significant’ profits to the streaming distributor in both revenue and market valuation. (I co-wrote a whole paper about this with Professor Claudio Feijoo for the World Intellectual Property Organization.) So it should be no surprise that in the finest tradition of the record clubs that the film studios have discovered a new way to rip off their featured and nonfeatured talent. And the best evidence is Scarlett Johansson’s lawsuit against Marvel and Disney for the way Disney bungled the artist relations issues surrounding the release of Black Widow.
David Dayan at The American Prospect nails the real labor relations issues underlying this pivotal lawsuit in his must-read post The Implications of Scarlett Johansson’s Marvel Lawsuit. David is one of the only journalists out there today who takes the time to understand the true implications of streaming. I highly commend this post to you and every talent lawyer and union negotiator.
We should all rally around Ms. Johansson for taking on what is sure to be a grinding knockdown dragout lawsuit, but we can already learn a few things from the Happiest Place on Earth.
Yes, they will screw you no matter how big you are, even if the result is you’ll never work for them again.
Streaming is probably the most corrosive technology to hit the entertainment industry in history.
Holdbacks (or “windowing”) is a real thing but it’s only as real as the downside for the inevitable breach. Whether that is a lawsuit or a liquidated damages clause that requires the studio to pay as if the windowed event had not occurred remains to be seen. (Example, I get 10x up front and 1000X cash bonus on the backend if theatrical is wildly successful plus studio agrees not to stream in the first 100 days. If studio breaches and streams, I get my 1000x cash bonus regardless of how theatrical window performs, plus whatever else I would get from the streaming release.)
The days of backend-loaded deals may be drawing to a close which will cost the studios more money up front for fewer actors.
Streaming platforms should be paying residuals and bonus payments to all workers on a film, including below the line union workers.
The Happiest Place on Earth is headed for a strike, the likes of which we have never seen before and if it weren’t for COVID it would already have happened.
It’s a very important case that tells a really sad story. And it’s probably the first of many.