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Comment by shp0ngle | Hacker News Reader

From TFA, since people love to react just to a headline:

“Just so there won’t be any misinterpretation about the rationale for our decision to sell, let me be clear: We’re a music company, and not, by our nature, long-term holders of publicly traded equity,” he said. “This sale has nothing to do with our view of Spotify’s future. We’re hugely optimistic about the growth of subscription streaming, we know it has only just begun to fulfill its potential for global scale. We fully expect Spotify to continue to play a major role in that growth.”

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When companies hold stock as a means of storing capital, the portfolio should be diverse to avoid risk.

Spotify stock is highly correlated with their own line of business.

Unless you're a strategic investor, holding any one stock is just not profit optimizing.

From memory the vast majority of Yahoos stock market value comes from the fact they own a large stake of AliBaba.

I'd say they were in a position of being strategic investors. There are only a handful of major labels and Spotify is slowly killing legal downloads which itself killed physical copies.

They owned a piece of the future of music distribution. And as shareholders and content providers they could squeeze every bit of profit their way.

They've redistributed the profit of the sale so they're not going to reinvest it.

My guess is that they plan on squeezing Spotify even more and know that this will kill the valuation. As there are more strong competitors now (Apple Music is said to soon overtake Spotify in the US), killing Spotify doesn't matter much.

Globally Apple Music and everyone else is significantly behind Spotify

Apple is growing faster than Spotify (https://bgr.com/2018/07/06/apple-music-vs-spotify-subscriber...) and Apple doesn’t live or die by Apple Music like Spotify does.

You should always be afraid when your entire reason for living is a feature of a larger company.

> You should always be afraid when your entire reason for living is a feature of a larger company.

Isn't this true for a majority of companies?

Not really. Google, Facebook, and Apple aren’t focusing on everything.

But music is definitely something that Apple has been focused on since 2001.

I was going for this applying to every industry. There's almost always a giant competitor that does almost exactly what you do. I personally feel the software industry is a bit easier to escape this problem, since it's quite low overhead to pivot in comparison, and it pushes so many solutions to problems people didn't know they have/want, instead of being more commoditized.

I'm not sure about 'always.' Google's search was just one feature of AOL's homepage.

In fact, a lot of startups have grown specifically because they focus on one thing and their competitors have varied goals.

It also doesn’t help when you have high marginal costs. Spotify has to pay the record labels for each new user. The marginal cost of each new Google user was basically zero - of course costs go up as a step function, but the marginal cost is less than a rounding error.

I don’t know what the numbers are today, but back in the day, the guy in charge of Zune music said they were paying $8 per user for thier subscription music service.

Spotify is completely beholden to its suppliers - the record labels. They can and will squeeze every ounce they can get out of Spotify. Apple can afford to operate Apple Music at break even or a slight loss because it is just a feature to sell high profit margin hardware. That’s all Spotify has, it has to make a sustainable profit from streaming.

Spotify is beholden to the record labels for now, but as music sales continue to weaken, much like DVD sales did, Spotify will be grow as one of the main outlets to reach customers for the record labels. If they can swing it they could become a major label themselves, like Netflix has with films and television.

And Netflix also will have the same problem. Streaming will just be a feature for a company like Disney. By the time a Marvel movie for instance gets to streaming, its already made hundreds of millions of dollars from theatrical releases, dvd sales, VOD, etc. The streaming service doesn’t have to be self sustaining.

Netflix is also struggling under a heavy debt load and is still not consistently profitable.

If any of the major record labels leave Spotify - they are toast. Especially if all four labels stay on a competing service. People are okay with getting thier movies - that they will probably only watch once from different places. No one wants to have multiple playlists from different services.

The music industry already tried that. Before the days of iTunes there were two subscription streaming services - MusicNet and PressPlay. Each had two of the major labels. That failed miserably.

If an artist is exclusively on Spotify, they’ve lost exposure to much of the more affluent users who have iPhones and are more invested in the Apple ecosystem.

Developing countries grow faster than the U.S, but that doesn't mean much in terms of long-term potential

Then again, that's what was said about Dropbox - Google was about to eat their lunch any day now. Yet they're still around and still growing quite a lot.

Not a great example....

https://qz.com/1214822/dropbox-is-filing-for-a-500-million-i...

The company’s prospectus warns it has “a history of net losses”; anticipates increasing expenses and slowing revenue growth; and notes that it “may not be able to achieve or maintain profitability.”

Eh, that's just the typical IPO prospectus, all doom and gloom. They're at billion-dollar revenue, still grew 30% in a year, and are cashflow-positive.

MoviePass also saw increasing revenues when they dropped the price from $50 to $10....

As far as being “cash flow positive”....

https://www.cnbc.com/2018/03/21/dropbox-may-have-intentional...

A closer look at its financial statement shows the online storage company's free cash flow would have remained negative that year had it followed a more conservative accounting method shared by some of its main competitors. That's because Dropbox didn't include principal payments for its capital leases in its free cash flow statement. If Dropbox had accounted for the $139.5 million in capital and financing lease payments in 2016, it would have recorded negative $2.1 million in free cash flow that year — instead of the $137.4 million positive free cash flow it disclosed. Its free cash flow for 2017 would have been $169.7 million under this method, almost half of the $305 million it disclosed in its filing.

These are real expenses, that would be like me telling my wife that we would be cash flow positive with our current income if we moved to Seattle - as long as we don’t include rent.

Yea, but they’re mostly interchangeable. Not a good thing for spotify.

Yes, they were.

>Apple Music is said to soon overtake Spotify in the US

I don't see how. Apple users use Apple Music or Spotify. Android users use Spotify. Android has 80% of market share globally (though only 55% in the US) and their market share is increasing.

"Android has 80% of market share globally" is not an adequate rebuttal to "Apple Music is said to soon overtake Spotify in the US."

While I happen to agree that Spotify is going to remaing the dominant player in the US for a long time, global Android market share is pretty irrelevant.

People really need to understand that a chunk of that 80% market share are people who bought their phone at places like Walmart for around $35 who are pay-as-you-go. They are not using the phone for anything but text and calling. This can be seen in the number of phones sold with older OS versions.

Apple's market strategy is to take all the money off the top end of the market, and leave everyone everyone else fighting for the remnants. Unit sales don't count when there is a big mismatch in net profit per sub.

I don't know what the current market figure is for handsets, but a couple of years ago the rough stat was that Android had 80% of the unit sales and Apple had 80% of the profits.

>Apple Music is said to soon overtake Spotify in the US

Do you by any chance have a source for that claim?

Probably thinking of this: https://www.digitalmusicnews.com/2018/07/05/apple-music-spot...

(Not the gp, but) [n]ope. Recently there was a headline that apple music was gaining subscribers faster than spotify -- that's because apple music is smaller. I highly doubt it surpasses spotify.

When music isn’t on spotify, how do you sync it to all your devices?

You can sync playlists of local files from a desktop to a mobile device, I believe. It's definitely a little clunkier than the direct uploads that some other streaming services provide, though.

If you read between the lines in that statement, they classify Spotify as "publicly traded equity" as though it were some random stock rather than "a music streaming service--a new class of company that will be essential to music distribution in the future and therefore a wise investment for us to hold indefinitely". They say "our view of Spotify's future" rather than "what we intend to do to Spotify". They say "We ... expect Spotify ... to play a major role" instead of "We intend to undermine Spotify among its competitors so that it cannot become the dominant player in their market and therefore lay claim on some of the revenue streams that we feel should go to us exclusively". I hope they shoot themselves in the foot with a diarrhea-dipped bullet, and then die from the infection.

Old-school music publishing is full of assholes. It has been for a century.

The major publishing groups are preparing to stab Spotify in the back. Or the gut. Wherever. They don't care. They just want a bigger piece of everyone else's pie.

My first guess is that they read the financial statements as shareholders, figured out exactly how much they could charge for their catalogs without killing Spotify, and then pulled out, because their stock wouldn't be worth anything once they were taking all the money out on the operating expenses end rather than the dividend end.

Every public statement they make is a misrepresentation, especially the ones that say they aren't misrepresentations. Spotify needs to go direct to the musicians, and get as many self-cover and faithful cover recordings as possible, as quickly as possible. They might lose the major performing artists, but if they can sub in a cover band or fresh recording under different copyright that sounds almost as good as the original, I certainly won't care, and I'm guessing a lot of other people feel the same. I like Weezer's "Africa" better than Toto's, and Cake's "War Pigs" better than Black Sabbath's. And there are a variety of "Ring of Fire" covers that I prefer to Johnny Cash. The publishers only control their recordings. If you can license the music and lyrics from their copyright holders, you can get new recordings that cut the previous publishers out entirely.

Spotify would be taking a serious risk should they attempt to become a record label, that is, they may find themselves locked out of competing catalogs.

I think you're spot on in your analysis. It's clear that the record labels intend to destroy Spotify, now that they've profited nicely from the arrangement. My thinking is, the record labels are colluding to decimate Spotify's profitability by strong-arming them into onerous licensing terms, then once the share price drops sufficiently, the labels will join together to take over Spotify entirely.

I don't think Spotify can take the Netflix approach and win. Their only avenue for victory may be the legal system.

They're going to get locked out eventually. This is a scorpion-and-frog situation. It's in a major music publisher's nature to screw everyone else they do business with.

So anywhere one could say "they might get locked out if they do this" could as easily read "they might get locked out sooner if they do this".

Another advantage Spotify has over traditional music publishers is discoverability. The major publishers make most of their money on the most listened-to recordings of all time. Artists out on the long tail, with good product, but no hits, or in a narrower genre niche, get worse deals from the major publishing houses, and more to gain by bypassing them and going indie. If they can get a recommendations engine to introduce indie artists based on likes and dislikes from mainstream artists and pop tracks, and to occasionally sub in covers and style-shifted recordings, the consumer will likely accept it.

I don't need the Rolling Stones, specifically, to paint it black. I don't need any boy band in particular, anywhen from the Monkees to BTS, to reassure me that I'm their girl, baby. I don't need exactly Whitney Houston to be the one to always love me. I might need Prince to be Prince, Beyonce to be Beyonce, and Bruce to be Bruce, but I can deal without, if I have to.

With the media consolidation in TV and radio, I can no longer effectively discover anything new over the air. Everyone plays all the same songs, all the time. I can turn on my radio and spin the dial all the way around and never once hear even proven star Bob Marley, much less Peter Tosh, Jimmy Cliff, or Desmond Dekker. I can spin it again and never hear more than a sample of George Clinton, much less James Brown, Sly Stone, or post-NPG Prince. I can spin it again, and fail to hear anything as metal as Metallica, as punk as Rancid, as emo as My Chemical Romance, as polka as Weird Al, as march as JP Sousa, as southern as Lynyrd Skynyrd, as jazzy as Louis Armstrong, as bluesy as BB King... all the stations play only the released-for-radio recordings that sold the most copies. And a lot of the stations play only the current top 40 for pop. If Spotify can get people to listen to stuff they haven't listened to before, they will end up liking some of it, too, and wondering why they haven't ever heard it before.

It is just not convincing. Their action tells all.

So why don't they keep the shares of they are so optimistic?

Potentially for immediate liquidity to invest in multiple new assets? I assume they made quite a bit of profit on their initial Spotify investment.

My guess is they probably made the investment in the first place to make sure they were onboard if/when music streaming took off. Now that it's well established, and there are competing services, they are probably better off by not playing favorites and being able to squeeze Spotify when negotiating licenses without harming their own investment (similar to what the movie industry is doing with Netflix).

What stops Spotifyfrom trying to fight back with more tools for recording artists? Find out what artists need and allow them to self publish on Spotify? I imagine recording an album is orders of magnitude cheaper than just the production cost of Westworld or black mirror.

I mean just following the Netflix route in general. Is Spotify already doing this?

Publishers do more than deliver music to the audience. They do market research, facilitate collaboration, fund production, and they promote the music.

Even if musicians can reach the audience directly, which they already could for some time now, they benefit a lot from a publisher that creates opportunities and handles business while they focus on making music. Too many good indie musicians are just a publisher away from success.

There are also many publishers who are horrible people, lock people into huge contracts where they basically kill the artist off by forcing them to produce crap. There is a need for another change in the music industry, removing the need for the big publishers and handing power back to the creators.

I agree we need new tools to replicate the other tasks that the producers do apart from funding production / studio time. The question becomes if we have reached a time when having a good twitter/snapchat/facebook profile is enough to promote an artist.

Then there is the question of what an artist/creator actually needs to earn to be successful. Is it enough to live on, provide for your family, and let you save for retirement? Does your goal really need to be to become a mega-star making millions?

Its my opinion that if we reduce the expectancy of the artist/creator to more of a "standard" earning level, then there might not be as much need for the big producers? It might also make artists happier by giving them the option of being creative without as much control of outside forces.

>Too many good indie musicians are just a publisher away from success.

But with the GP argument one could say an algorithm away...

Yeah. The real trick (at least in the US) is to get your music on the radio (see https://qz.com/1094963/radio-survived-the-tape-cd-and-ipod-i... for an example). People still seem to look for new music on the radio here, and a publisher can make that happen much easier than Spotify can.

They have access to investment opportunities with a higher expected return and they are therefore rebalancing capital. Spotify is now a large, public company with attendant growth expectations. Most substantial corporations can allocate capital more effectively than leaving it in a publicly-traded equity.

What purpose does it serve. Any investor looking to invest in WMG isn't going to do so because they own some spotify. If someone wants to invest in Spotify they will go buy some spotify stock. It doesn't serve investors to have some of their capital tied up in an unrelated stock. The normal reason for having stock in another company is in order to get favourable terms in a negotiation - which I do think could be useful here, but isn't always the case.

I don’t believe the stakeholders listed in the article have sold for routine reasons, simply because the amounts of money they realized in the sale are tiny in an absolute sense, especially for Sony and WMG. They didn’t hold the stock to make a small absolute profit from it (whatever the return rate is, at a small total sale price like a few hundred million it’s irrelevant).

I think it only makes sense to materialize such a small profit right now if it’s based on highly negative outlook about Spotify’s valuation.

Of course, it would also make sense to sell the stock if they were going to pull their catalogue or start their own service.

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