From Michael St. James on Fb., 5/07/18: Hey, remember when Sony sold half of their Spotify stock? Well, today, Warner Music Group says it has sold 75 percent of its Spotify shares, for about $400 million – per
Chris Kresge: To what end do you imagine? In explaining the divestiture of the Spotify shares, Cooper cautioned that the move shouldn’t be interpreted as a loss of confidence in Spotify.
“We are a music company and not by nature longterm holders of equity,” he said. “We expect digital streaming to continue to grow and we continue to expect Spotify to play a major role in that growth.”
MSJ: Chairman said. “We’re a music company, and not, by our nature, long-term holders of publicly traded equity.” made a point that it is not pessimism about Spotify’s future. Publicly, they say it’s to capture some of the profit for their artists and songwriters who have not seen revenue or profit while Spotify grew to $27b evaluation. Privately, there is absolutely no signal that is going to happen.
CK: Right .. just read the same, more or less…
I don’t see it as changing the streaming landscape however
MSJ: Ok, nothing to see here.
But to say they don’t hold equities is a straight up lie. https://www.sec.gov/…/000119312512023343/d281287dex211.htm
CK: There’s a much more detailed story in Variety … http://variety.com/2018/biz/news/warner-music-group-sells-75-of-its-spotify-shares-1202800953/
Warner’s percentage of ownership was not disclosed, although it is less than 5%, the minimum that would make the company obligated to disclose changes in its holdings under SEC rules. At the time of Spotify’s initial public offering, Sony Music Entertainment owned 5.7% of Spotify’s outstanding shares, or 10.16 million shares. With the sale, Sony Music retains 8.4 million Spotify shares, or 4.7% of the internet company’s total ordinary shares.
MSJ: Warner had 4% or so. | No, Variety got that wrong. There was no confirmation of the exact value of these shares, but according to MBW analysis, in total they would have been worth somewhere between $740m and $790m.
That’s because Spotify’s NYSE share price fell to a daily low of $144.32 on April 6, and reached a high point (before April 27) of $158.45 on April 20.
We already know that Sony cashed in 1,748,304 shares on April 3 (the 17.2%) which would leave 3,333,976 shares (32.8%) remaining within a 50% tally of its total holdings.
With the 17.2% fetching $260m, the remainder of the 50% would have added between $481m (at $144.32 per share) and $528m (at $158.45 per share). That’s approximately $750m in total.
Sony owns less that the 3% now.
MSJ continues: Why sell 75%? Why not follow Sony at 50% They only held about 4% so now that’s down to 1%. HEre’s where it comes into play. In the middle of next year, they will start negotiating in the fall on next year. All of them stuck new deals in 2017 – but few people know those are only for 2 years. Now that they won’t be making the IPO money,. or much of the shareholder money, or breakage upfronts, expect one of the major three (probably Warner) to play hardball. That’s where this really comes into play. It was always conceded that as long as the majors held significant stakes, they would play ball with the licensing deals. Well, they no longer do.
MSJ continuing: So, Chris asks a good question, “So what? I don’t see a big change in the landscape” We can constantly explain away change ion ownership, licensing rates lower than legal (yes, that’s what the labels did to get those percentages), and streaming is growing, making money, nothing is going to stop, everything is fine. Ok…. So, why would no bank take Spotify public for an IPO and they had to do the very odd DPO? Everything is fine, right? So, why did 2 major labels sell over half of their stake in the first month? Wouldn’t the value grow exponentially in a year? That seems like corporate malfeasance to take the profit in the first month and run with it. So, why did the analysts kills Spotify in rating after they meet their subscriber goals this quarter? I mean, this thing is just going to keep growing and making money right? Spotify is down 7% since May 1, almost 3% today alone. Just wait until UMG sells its shares. And then Tencent will sell about 1/2 of theirs. Look, here’s the thing. NONE OF THIS IS NORMAL. This is not how most businesses work, it’s not how most investments work. You can convince yourself otherwise, but it is literally unprecedented. Did I mention the Music Modernization Act? Dod I mention the $1.6B lawsuit with Wixen? It’s not normal.
CK: Right. I don’t see time moving back. I don’t see the deconstruction of the industry to a time pre-streaming.
Todd Divel: Inflate and cash out.
CK: So I guess what I’m trying to discover is with all the math, and who owns what, etc .. how does any of that affect those who own the content that is streamed on this platform?
MSJ: Well the only way any of this makes sense is to pay the majority of music less royalties – yes even less than the amount now. Spotify is already doing that with the majors (making it up with breakage and % ownership) so if re ownership and breakage deals lessen significantly, then the royalty will move too. (And it already is for indies). This leads to a cascade of lower payments, but still no profit, and that in turn will turn ratings and analysts against the stock. It’s the beginning of a huge change.
CK: Do you suspect it’s the beginning of a change in how these types of companies operate? If there’s no profit in the game – then what?
To be continued!