I have often said that if I was able to persuade the entire entertainment industry to devote say 10% of their marketing spend to aardvark.com, then aardvark.com could be as big as YouTube. This, of course, is an aspirational statement that doesn’t take into account how Google would react or how Google games search result, but you get the idea.
Somehow YouTube has managed to convince our marketing folk that they just can’t get along without the views and likes. But is that really true? Will people listen to music somewhere besides YouTube if YouTube wasn’t there?
At Chartbeat, we got a glimpse into that on August 3, 2018, when Facebook went down for 45 minutes and traffic patterns across the web changed in an instant. What did people do? According to our data, they went directly to publishers’ mobile apps and sites (as well as to search engines) to get their information fix. This window into consumer behavior reflects broader changes we see taking hold this year around content discovery, particularly on mobile.
So when YouTube tries to tell us that we can’t get along without them, which is definitely the implication of Google’s most recent charm offensive in the European Parliament, it may not even be a close call. Particularly when you consider the downside from low royalties, unchecked stream ripping and YouTube’s corrosive safe harbor practices.
Fans found music they loved before YouTube and they will after YouTube, just like they did after Tower Records–and Tower Records didn’t spy on them. And that’s what the Chartbeat research showed about news sites after the Facebook outage:
Key data points show that when Facebook went down, referrals to news sites fell, as expected — but other activity more than made up for it.
Direct traffic to publishers’ websites increased 11 percent, while traffic to publishers’ mobile apps soared 22 percent.
Search referral traffic to publishers was also up 8 percent.
Surprisingly, there was a net total traffic increase of 2.3 percent — meaning that the number of pages consumed across the web spiked upward in this timeframe.
What if it turned out that YouTube needed us more than we need YouTube?
Spotify is experiencing the joys of being a public company–or at least a quasi public company if you count public companies as ones whose shares are actually held by the public as in Mrs. & Mr. America. But both analysts and investors have to always remember that Spotify did not conduct an IPO in the traditional sense where an underwriting syndicate of bankers bought a block of shares from the company that the syndicate then resold to the public. This is why Spotify’s recently announced $1 billion stock buy-back program bears closer scrutiny.
Instead they conducted a DPO, a direct public offering which is unusual and radically different than an IPO. The DPO has an essential conflict–the sellers of shares are insiders in the issuer and have an incentive to keep the stock price high and to manipulate that stock price however they can. Like through a stock buy back after less than a year of trading, for example.
From a financial markets point of view, that DPO makes almost everything about Spotify’s stock a different analysis than a market traded IPO–including Spotify’s recently announced stock buy back. Stock buy backs happen all the time, particularly in declining markets. But what is unusual is for a company that’s still in its first year of operating as a public company whose shares are largely traded by insiders and is a money losing company to take the odd step of using $1 billion of the shareholders money to buy back stock.
Or maybe not so unusual if the shareholders whose money it is are both the sellers of those shares and the beneficiaries of the stock buy back–as they try to find a bigger fool to sell the shares to in the retail market. Another core problem with DPOs is that you don’t have an independent body setting the opening price as you would with an underwriting syndicate. DPOs have to get an opening price from somewhere–so Spotify’s pricing problem started with the SEC and NYSE allowing Spotify to price at its last privately traded price (as some shares of Spotify traded in what used to be called a “Rule 4(a)(1)1/2” exemption for resale of restricted stock, now codified in Section 4(a)(7) of the Securities Act by the FAST [Breakfast at Buck’s] Act–a bit of a gloss but OK for our purposes here).
So by letting Spotify use the private market for restricted stock as a proxy for a market price, at a minimum the SEC and the NYSE assume that the rights, preferences and privileges of an unregistered share of Spotify stock are the same as a share of registered SPOT. They’re not. They also assume there are no price distortions from the relatively low number of unlegended restricted shares available in the private market. They also assume that there’s nothing odd about a company like Spotify–staring down relatively slam dunk infringement lawsuits of significant value and in a money-losing business run from 10 floors of the World Trade Center like it was Apple or something–pricing way above the opening prices of Amazon, Facebook, Google and so on.
If that sounds cynical, it really isn’t once you understand the dynamics of a DPO compared to an IPO. The DPO produces a market effect that is similar to the business model of Larry Ellison’s famous 1999 “HeyIdiot.com” parody of an Internet company:
HEYIDIOT.COM is tightly focused on selling just one product. Elegantly enough, that product is the stock of HEYIDIOT.COM, which will be offered to you for sale on-line at our web site of the same name. Buying the stock is simple, you can buy as much stock as you want with the only rule being that each new purchase must be executed at a successively higher price. We call it a cash portal.
We’re seeing the result of the DPO come home to roost in Spotifyland which looks something like this:
After a run up in the stock price–on low volume and with no meaningful news–the stock retraces its steps and suggests its testing lower lows. It’s hard to say what “price support” there is for a stock that’s had less then a year of trading, but let’s just say that if it broke through $100 to the downside, there would be rending of garments and closer examination of executive compensation unless Spotify executives could continue to blame artists for “high” royalties.
Also note that three out of four of Spotify’s biggest volume days were to the downside, and that the stock has been trading down, essentially, since August.
We can also assume that at these low trading volumes, the shares have gradually been accumulating in the trading accounts of Mrs. & Mr. America which also means that there are potentially more and more shares available to short sellers–the buy high sell low crowd that I discussed back in March.
In fact, there are a few November 30 puts in the $115 range already. Daniel Ek has announced he’ll be selling Spotify shares with a value of about $20 million on a monthly basis for a while. You have to notice that those board-approved sales are overlapping with the board-approved Spotify stock buy back that will help to support the higher price point while insiders dump their shares. This is another inherent conflict problem with the whoe DPO concept–but when you have the 1:10 voting power over your board as does Mr. Ek, many things are possible.
Stocks go up, stocks go down, what does it all mean? In the very recent declines of the stock price of credible companies, you saw them punished for good quarters but guiding lower. Even “big tech” stocks like Google and Amazon were punished for revenue misses and cloudy guidance.
What’s happening with the Spotify stock price? I would argue the main downward driver for SPOT is much more straightforward–the market is simply catching up to the Spotify DPO and its insider-heavy stock sales. We won’t really know the hard numbers on insider trades until the SEC starts making those insider Form 4 sales more easily available online. That should should happen any day now (and none of the mainstream music industry publications seem to be interested enough in the the truth setting them free to actually dig through the SEC Form 4 filings at the source).
But–there could be enough shares out there in the marketplace that SPOT may be starting to trade like an IPO as opposed to an insider cash-out (or DPO). And once the market really becomes part of the Spotify trading day and trading volume increases, a few things start happening. One is that as more shares are held by the public, there are an increasing number of shares available to allow the “buy high, sell low” short trading that can cause big swings in a stock’s price due to short covering if nothing else.
SPOT also starts to become more susceptible to the other stocks in its cohort as more retail investors have to answer the question, what will I sell to buy Spotify? The answer will be different for different people, but if there are more sellers than there are buyers, we know what happens. That’s why the majors, Sony in particular, were very smart to start selling their holdings almost immediately.
What would you sell to buy Spotify? Probably not its competitor Apple–whose shares trade almost opposite to Spotify on a relative basis.
If you’re looking at the performance of SPOT, you have to ask yourself what about this chart says “buy”?
You have a stock that’s broken through both its 100 and 50 day moving averages to the downside as of yesterday, and so far in today’s action is testing lower lows. And not surprisingly sank like a stone following a “head and shoulders” top technical chart pattern indicating a potential bearish trend that has now been confirmed (as I began watching in June on Music Tech Policy before the stock gave up almost $50 of its share price).
I guess the MMA safe harbor is priced in.
Keep asking yourself that question: What would I sell to buy SPOT? If you’re not an insider, that question will eventually guide you (and the market) to the right share price. That will have nothing to do with Spotify’s royalty payouts, how many floors of World Trade Center it rents, or competition with YouTube or Apple. Don’t let the analysts (or the company) fool you–although some analyists are starting to face the Spotify reality.
That will be–I would suggest–a problem with the insider-controlled Direct Public Offering structure and the SEC’s decision to allow Spotify to price at a meaninglessly high number. What goes up on fantasy comes down hard on reality.