Flip the Switch Episode 31: Spotify IPO
by John Saunders •
SOPHIA: Today on Flip the Switch. Panera Bread is the latest company to suffer a data breach, as data storage continues to be the hottest topic on the internet. Facebook continues to get dumped on as the tech giant admits they are scanning user’s DNs and Zuckerberg is set to testify in front of congress.
Today’s main discussion is around tech company IPOs and how Spotify stacks up against other recent tech public offerings. We finish with everyone’s favorite segment, “A Minute with Musk.” Let’s get into it.
00:57 AUSTIN: Welcome to Flip the Switch presented by Power Digital Marketing. We are very excited to bring you episode number 31.
01:03 PAT: Episode 31. Our Dave Winfield episode. Timely, because opening day for the MLB was recent. He was a Padre for 7 seasons.
01:12 AUSTIN: Way to represent San Diego. I was going to say Mike Piazza, but I like yours better. Much more relevant.
01:15 PAT: We’re already grasping here. We’re out of all the good numbers. But he’s still a Hall of Famer.
01:19 AUSTIN: But we… as always… are not here to talk about sports. We are here to talk about business news and trends in the tech field. A lot of interesting stuff has happened in the past week. Data breach is still hot in the streets. We’re seeing that a lot.
Facebook having a lot of issues. So let’s go ahead and jump into it. Unfortunately we’re starting with Panera Bread. They are the latest company to suffer a big blow in data storage issues.
01:41 PAT: Yeah, so I was just as surprised to see that as I think everybody was. Because you don’t really associate a data breach with a singular company…
01:49 AUSTIN: With a bread bowl.
01:50 PAT: Exactly. With a bread bowl. But essentially what happened is that up until this past Monday… and this came out on Fortune.com. A tone of consumer information including their names, email addresses, home addresses, birth dates, and the last 4 credit card digits were accessible as plain text on the company’s website. And it’s not clear yet, whether or not anybody actually accessed this data. And this was also supplied by customers who had made accounts for food delivery or other services.
So to my understanding, even if you used a 3rd party food delivery service… like a Postmates… your data may have been compromised.
02:24 AUSTIN: I think the big issue here that we’re seeing with outside services with Panera. So Postmates or DoorDash or some sort of service. If they were the ones that were also breached along with Panera, that’s a very large issue in terms of what that means for people using applications.
And also the largest issue is with the credit card numbers.
02:42 PAT: Yes. Huge issue.
02:45 AUSTIN: That’s if you are someone who’s been going to Panera bread, I would definitely check and make sure that you haven’t had any strange credit card transactions lately. As we’re saying, we’re not totally sure… they think about 10,000 customers total. So not substantial… not like what we’ve seen with other large breaches like Facebook or Equifax. But enough to get noticed that no company is safe. There’s a ton of vulnerability with networks at the moment and there needs to be a very large change in the way that networks are created, because this is a continuous issue.
03:15 PAT: Yeah, exactly. This is the bulk of what we’re talking about today. And the fact that we even need to talk about this, almost gives validity to… I think of my grandparents, let’s say, that are like “don’t put anything on the internet. Don’t put all your private information on the internet.”
And I’ve always just been kind of like, “Yeah, but I know better. And I’m gonna…”
And now we see that there are actual consequences to doing that, that you need to accept as the user.
03:38 AUSTIN: And now that we have… our lives have become so impacted by applications. So apps on your Smartphone. And we don’t even think about it anymore. You’ve got 30, 40 apps on there. How many of those have you had to put in an email address to fire up? How many of those have credit card information on it? How many of those have every single private information that is important to your daily livelihood.
03:59 PAT: Right. And that’s your whole identity.
04:02 AUSTIN: And that’s something as a society we’re going to have to learn to focus on. Because it’s become… yes, very useful to have all these applications. And they help our lives on a day-to-day basis.
But it’s created new vulnerabilities in our world. And a lot of this is with data that we used to not have on the internet. It used to be very private. And now is very accessible at the click of a button for a lot of people that we do not trust.
04:21 PAT: I agree with you. And I think the most interesting part about the data breach trend that we’ve seen lately has been these companies responding to it. I always like to run this by our PR department and talk with them about it to see how the situation should have been handled.
But this Panera situation is like a textbook scenario of what not to do. So basically the problem was identified back in August of 2017 by a researcher named Dylan Houlihan. I believe is how you say that last name. At any rate, he had told their Information Security Director about the leak. And he said that despite an explicit acknowledgement of the issue, and a promise to fix it, Panera bread sat on that vulnerability and did nothing about it for 8 full months.
So that already off the bat is a huge issue. And that’s the same thing that we saw with Equifax. It’s very reminiscent of Equifax. Because I think that was a 6 month ordeal. And that’s more sensitive information. You’re dealing with social security numbers, credit history, purchasing history…
05:19 AUSTIN: That was millions. So luckily this is on a smaller scale. But it’s the same situation. And I think the problem is that companies don’t understand how to deal with a security breach. And then they clearly cannot identify where it’s coming from because it was that simple to shut it off, then it would have been solved 8 months ago…
05:33 PAT: Yeah, they freaked out and took their whole website down for a little bit. That was the only fix that they could think of. And I think that another interesting point to on that PR front is that they had said the issue had been resolved and affected fewer than 10,000 customers. That they provided to Fox news. They said they’re continuing the investigation.
But Brain Krebs, who is an analyst, and he said… he responded to this on Twitter suggesting that the problem was bigger than they had let on. And that vulnerabilities remained on the website even after Monday, right?
He estimated–and again, this his own estimation–that as many as 37 million Panera members had been caught up in the breach. And he’d initially estimated around 7 million.
So I think that… like we said, they took their entire website down. The problem looks to have been corrected. No representatives talked to Fortune magazine about this specific story. But I think that the biggest takeaway from this is that when you are a website or you are an online application of any kind, you need to be taking hyper-proactive steps to firewall off that information. Because you do not want public backlash when something like this happens.
And we’ve even seen it with Facebook like we’re going to get into in a little bit here. There’s the whole Delete Facebook movement now because people are feeling violated. They’re feeling like, you know, “I thought that my stuff was safe, and now it’s not.” And that’s an unsettling feeling for people who like we talked about before, are so dependent on technology and application for their day-to-day that it’s tough to figure out what you’re going to do without it. I think people will probably be able to live without delivering Panera. If you love it that much, go to the restaurant type of thing. But at the same time, it’s the principle and the idea. And the precedent that it sets.
07:10 AUSTIN: And the way it affects your brand.
07:11 PAT: Exactly. Exactly. So more to come on this. We’re definitely going to be following this story very closely.
But one thing that we wanted to get into was a very hot topic as of lately which is Facebook.
07:20 AUSTIN: That’s right. So Facebook is doing exactly what they shouldn’t be doing and continuing to leak more information about how they have exploited your information and given it to the wrong people.
So as we understand, there’s been a lot of talk with Facebook Messenger–so it’s the app that breaks off from Facebook–and it’s all about how they analyze the messages that come through. That are sent. So photos and text that is sent between people. Supposedly Zuckerberg was trying to spin this to say that they’re doing this for reasons that…
07:49 PAT: Quality control, basically…
07:51 AUSTIN: Right. Trying to get out negativeness. So they want to make sure that nothing bad is happening. They gave a couple of ideas that were supposed to be keeping the community safe. They have community operations and community standards. So they’re trying to make the messaging app very clean and secure.
But the issue is once again, the data’s falling into the wrong hands.
08:09 PAT: Yeah, exactly. And I think that this is not necessarily as much that the data is or is not in the wrong hands. So much as it’s a practice that Facebook has employed for a long time to make sure that people on their platform are adhering to community standards and community guidelines. Without the public really having great insight into that fact. And I think that just in looking… doing our research on this and taking a look at Bloomberg, which is where this article originally came out today… the biggest issue and the biggest disparity comes between what user’s believe–it’s the tease and seize, basically–what users believe their data’s going to be used for and the level of protection or regulation around that.
And what is actually occurring. There is gap. There is a disparity there that Facebook has not made super-clear to its users. And even then, if you look at what they’re supposed to be using this data for, I don’t necessarily believe that private messages between people is the best way to a) leverage your technology. Or b) adhere to the whole community guideline aspect of it.
09:05 AUSTIN: It immediately makes you think of ulterior motives, right? Why do you need this data if you’re… 1) I guess you’re scanning it to make sure, but why then sae it? If you are scanning it to make sure that it’s safe?
So there’s gotta be some sort of ulterior motive and I think that packaging up this data and doing something with it, to either improve their product or use it to possibly make their ad platform better. To get better insights into audiences. Is the reason why they’re doing this.
I don’t have any proof, of course, but why else are you keeping all this data? And then not telling anyone?
09:38 PAT: My theory about it too is that they’re using… I think they’re running essentially a sentiment analysis. So they’re determining who you are on a qualitative level through some of the most private aspects of their platform. Like the Messenger App, right?
And then curating… basically customizing your algorithm to your preferences that you’re showing not just publicly but privately as well.
I’d imagine that’s the way that they’re doing it. Again, we don’t necessarily know that, and I don’t imagine we’re going to get a ton of clarity into that. Because like we talked about, Marky-mark he is backpedaling right now. He really has his back yup against the wall. I don’t think he’s going to divulge any information around how it uses its data. How it collects the data. Anything that could open them up to additional scrutiny. Then he has to.
And if I were his legal counsel… which, again, I’m not…I am in marketing. I’m in no way associated with the law.
But if I were a legal counsel, I would tell him the same thing.
10:30 AUSTIN: Yeah, and on the… since we’re doing a little PR for these companies… the one message that came out was that their scanning systems are very similar to those that other internet companies use today. So they’re just basically attempting to brush it under the rug by saying, “Hey everyone’s dong it.”
10:46 PAT: Everybody’s doing it.
10:47 AUSTIN: Which then again poses this general question is… what are these internet companies doing with our data? Why are they keeping it?
And then the points we bring up today is probably the reason. But we don’t know yet. I think this is what… we’re going to talk about this soon. What Congress is going to try to do is understand what Facebook’s doing with this data and how they can better protect the users. Because 1) security breach is a big issue, and 2) just having 3rd party with this amount of data is a very big issue. You can see manipulation occurring in politics which they do not want anymore.
So I think that that is the biggest thing that Congress is going to want to do. And I think this is a good time to roll into that.
11:22 PAT: Yeah. Exactly. So news came out again this week that Mark Zuckerberg is going to have to testify before Congress on April 11th. This came out about 10 hours ago and we’re referencing a Tech Crunch article to go through this. So this is obviously all tied into the 2016 election, the data breach that was a story that we had covered actually last week or the week before. Cambridge Analytica.
They had originally estimated that it was 50 million users worth of data. Turns out that it’s closer to 87 million. Which by that point, you’re just dealing with numbers that are so big already that it’s not immensely more of an issue.
But the reason that it’s I guess from a philosophical level to people not that much more of an issue. But to Facebook, this is a significant issue. In the sense that… we talked about this… should this fall under SEC scrutiny… Or should this fall under any type of regulatory financial body… you’re going to get dinged for every instance. So if you have 37 million at minimum additional instances of data breach, there’s a potential for a very, very big financial hit to Facebook. Which is what we had seen in the stock market. It’s rebounding a little bit as a result of people wanting to be savvy and buy low. But I don’t necessarily think this slide is going to end any time soon.
12:38 AUSTIN: I don’t think so either. I think you’re totally right there. The fallout from the Senate hearing will be the true indicator of the health of the stock. So you really want to wait ‘til April 11th to understand what’s going to happen with them. Because as we were talking about the point is to understand what’s happening with the data. And then how to better protect it.
That is what Congress wants to accomplish here. And if Mark Zuckerberg comes in there and they don’t have a game plan, this could be a serious issue. Because if Congress needs to step in and kind of create a game plan, it shows that Facebook is a little weak in some areas. And as an investor, that’s not what you want to invest in. You don’t want to necessarily invest in a tech company that doesn’t have savvy tech.
So I think with Facebook long-term, they’re going to be fine. But we’re looking at this in a short-term scale. Looking at their stock price. The fallout from this hearing is really going to dictate what’s going to happen with their stock price in the short term.
13:30 PAT: Yeah, exactly. And then even taking that and looking at it from a long-term perspective, some of the actions that Facebook is taking to remedy this situation could set them up for future failure as well. I think that one reason that people liked and benefited from using that platform so often is because of the API. Like, there’s all these ways that you can plug into what they’re doing, basically. And as a result of the scrutiny that they’ve been placed under… Much less Mark Zuckerberg having to testify before Congress. Which it’s insane that we live in a day and age where the CEO of some tech company could be responsible to something to the magnitude that he has to testify before Congress. That sounds like any tech nerd’s worst nightmare, and it’s happening to him.
Btu as a result of that, too, they’re severely limiting how much of the… the API for Instagram specifically is available to people. And it’s limiting the data that’s available. From or requiring approval or access to Facebook event, groups, page APIs. The Facebook login. And a lot of this is because of that malicious activity and the system basically discovered that malicious actors were using those to scrape people’s data.
And they said, “Given the scale and sophistication of the activity we’ve seen, we believe most people on Facebook could have had their public profile scraped in this way.”
Through the APIs that they readily give to people. That they give access to.
So they’re going to be shutting down part of that API platform. It was scheduled for depreciation or basically close-out… sun setting… starting July 31st. It is going to be much faster than that. If I had to venture to say, but for now that’s what is being…
15:03 AUSTIN: I imagine this is one of those things that Congress is going to ask them to do. Beforehand or during the hearing. So they want to knock this out beforehand. So this is probably showing that they’re being proactive and trying to clean this up. Create security. So then they can come up with better ideas on how to use the API. Because for Facebook this is a big help to them.
There’s a reason why they created the API to utilize data for outside 3rd parties. Because it’s really helpful for them. It makes them grow their product. It helps them to improve the user experience on their application. So they don’t want to stop using it and they aren’t going to completely shut down the API forever. They just need to redo it. They need to remake it. They need to decide which data fields are going to be accessible for these outside parties and how is it going to be used? More importantly.
15:49 PAT: Yeah. And I think that to your point too, there is… I think that this is a microcosm of a bigger issue. And you even brought it up before. I think that it’s poor leadership right now with Facebook.
This is a very retroactive move to try to basically put a Band-Aid on something that now is a fully… a full blown wound…
16:06 AUSTIN: 100 million people deep.
16:07 PAT: Exactly. It’s not going to really do much. And I think that since people… cause they’re going to roll out access to some of these APIs again with more restrictions on how much data. And there’s going to be data limits and forms that you need to complete if you meet the certain threshold of data that you scraped. Basically stopping people from doing mass data scrapes and profile scrapes like they’ve talked about before.
But no one understands APIs. The vast majority of the public does not understand the nature of it. They don’t understand how it works. And I think that this is just going to tarnish public opinion around them. They’re going to see that they basically took away this access for a little bit, but then they give it back. On top of the fact that Mark Zuckerberg was on CNN last week, and he was basically like “hand-off until…” He said, “If I’m the most qualified person that has to testify, I’ll testify.”
Boom, one week later, he has to testify. I think he’s sending a lot of mixed signals and I think he’s really showing right now that he’s not super-capable of handling a catastrophe.
17:02 AUSTIN: And I think that what we hope Congress will do is force them to take ownership. There needs to be a consistent playing field here, with these tech companies that have all our data. Because at this point, we need to trust them. We don’t really have a choice. We need to trust these tech companies that we’re interacting with on a day-to-day basis to do the right thing with our data.
So hopefully Congress can instill that in Zuckerberg. He will probably understand that to a degree, but it’s really time for someone to make him take ownership and to have Facebook take ownership of what they’re doing. And also what they’ve created.
So if you go out and you create a product and a lot of people like it, and a lot of people use it, and then there’s negative effects. You own those too. You created this product, you created this social channel. So it is time for Facebook to take ownership.
17:44 PAT: Yeah. Maybe he will now admit that it was the Winklevoss’ idea or something for a lot of it.
17:49 AUSTIN: That’d be big Zuck move.
17:50 PAT: And I think the reason that this is so significant too as we wrap this up here is because this is… I think Congress is using this essentially as a chance to set a precedent. This is their opportunity to showcase to the world that they can do something about even people’s most sensitive information being hacked.
And to them… I feel that if it’s at the expense of one company, so be it. Because this is something that like we said, does need to have more stringent regulation and better protection for consumers moving forward. As tech is even further integrated in our day-to-day, and our basic processes as a human being. You’re leaving a digital footprint everywhere you go. And you need to trust that someone is there to cover up the tracks to an extent so that you’re not getting followed. All it is.
And right now I think Congress is hoping on this opportunity to kind of showcase the fact that they are handling this situation. And the converse is that Facebook is demonstrating a little bit of poor leadership. There’s not a ton of faith in them right now, and I think that moving forward, that’s what’s going to be called into question when people are looking to speculate around stock prices.
People value invest. And people invest in company leadership. And if your company does not have a good leader, it does not matter how good the product is. Because eventually that will come into play.
Not that he isn’t a good leader. I think that there’s a lot that he can still do here. But he has really dug himself quite a hole and I don’t think that he’s going to be able to get himself all the way out of it.
19:18 AUSTIN: All right, everybody. Main topic for today. We want to talk about Spotify, the music service. The streaming music service that just recently had their initial public offering. Their IPO. ON the New York stock exchange. This is very big news for music companies in general and then also technology companies in general. There’s a lot that goes into this and they are in a very unique position because there hasn’t been a lot of tech IPOs recently.
So we really want to dissect what they did, why they did it. And then of course, their projection. If you were going to invest in them, what would you want to look at?
19:51 PAT: Yeah, exactly. And I think that just looking at the initial performance is a great place to start. So it IPOs, it ends up about 12% from its initial start. I think it started at $132. It closed at $149. That being said the very next day… so that happened yesterday. The IPO was yesterday morning.
20:13 AUSTIN: And then it shot up 12%.
20:14 PAT: Shot up 12% because people were excited about it. It’s like, “Oh, Spotify’s public. I’m gonna buy into that.”
There’s a few things very wrong and we’re going to get into that. But we saw those shares tumble a little bit today. So shares went down 8.5% today. It sinks after going public. So it opened at about 140 after you include after-hours trading. And it closed 3% lower than its floor. So it fell down to $135 at one point.
20:44 AUSTIN: So why is that? And what do we think that is? And I think that we need to do is you gotta back up and try to understand the valuation of the company. So let’s try to decide is this company worth the amount that it’s currently project at?
So, with their valuation they come in at around 26 billion is what they’re at, which is quite substantial. Because if you look at what they do in revenue, they’re nowhere near that.
21:05 PAT: No. They did 4.6 million dollars…
21:08 AUSTIN: Yeah, you’re right. It’s right around 5 billion. So right that’s a great projection. And of course, when you IPO, you’re being valued at what you could be. You’re not being valued… and it is typically 3 to 4 times the size of what you’re doing in revenue.
So this is not necessarily wrong, but in terms of upward projections, how realistic is this? Well, let’s look at their costs. And right now, they have not been profitable a single year. So every single fiscal year that they’ve been in business… they are a private company out of Sweden. They’ve never been profitable.
And the reason why is cause of the business they’re in. They have to pay royalties to labels and artists. So this is one of the biggest issues that artists and labels have had in the 21st century is making money. And Spotify has brought them an entire new revenue stream.
Because Spotify knows that they consistently need to add new music onto there. Cause that’s what their users want. So they’re consistently updating their library. Which means they need to consistently pay labels.
So that is why they have this big issue of “our expenses outweigh our revenue.” And they do about 2 billion more in costs currently than what their revenue is.
22:09 PAT: Yeah, they’re operating at a loss.
22:10 AUSTIN: They’re operating at a loss. So they’re going into an IPO, and what they want is investors to really bump up the amount of capital they have. They want a big capital injection. And they say this isn’t the reason why they IPOed, but it clearly is. They are in need of some sort of capital injection of some kind so that they can get out from under this and really start to have a little bit of cash to create more of a revenue.
22:30 PAT: Right. And that’s really what people are most worried about. I think from an investor perspective about the music streaming business model. You need to find other ways to monetize your platform. And yeah, you can get MRR from having a ton of subscription users that don’t want to put up with the ads, and then you’re making that money. And if people are using the free version, then they have to put up with the ads. And then the advertisers pay you for that ad space. That all makes sense. That’s all well and good.
Those are two very low price-point ways to generate revenue when you’re a publicly traded company. And I think that it comes down to a bigger issue with tech IPOs that we have seen lately. And so bear with me on this.
And so you think all the way as far back… ad we talked about this too actually… on one of our first episodes was the Snapchat IPO. We went on record as saying that we did not thing that it was going to go well, and we were right. And the reason why we were right about that is if you look at… again, this comes down to company leadership.
If you look at the people that are running the company, they are not making the company any money. They have always been so okay with curating everything to the user and making enough money to sustain their business. They’re not used to having to be so profit-oriented and they’re just not used to that. It’s that entire business savvy side of the offering. And I think that’s a common issue that we see.
And that’s exactly what it was with Snapchat. How do you monetize this in a way that’s going to be beneficial for investors?
23:55 AUSTIN: Is this a viable business model? Is what we’re asking. And when you look at Snapchat they were the free-app version… that’s a business model that’s been very hot in terms of apps that have come out in the 21st century. And the fact of the matter is they don’t generate any revenue. So when you’re asking for investors to give you a large amount of capital, they’re expecting you to generate revenue.
Their capital is not the revenue. They need to take that money and use it to create new revenue streams and Snapchat… the thing that they really sold their investors on was the advertising. That they were going to be like Facebook and Instagram. That they were going to offer you a highly targeted audience, so that you could really understand and get the right ads in front of the right people.
But they’ve showcased that they haven’t been able to do that. So when you flop, that also affects your stock price. And that’s the problem with being a publicly run company.
24:41 PAT: Yeah, exactly. And so I think that’s one part of the issue. And like we touched on before, too… there’s the free listeners, there’s the paid listeners. Spotify only makes 10% of its total annual revenue from advertising to free users. And the subscription based model, while effective to an extent, still leaves them operating at a 1.5 billion dollar loss per year. Making them not profitable.
25:03 AUSTIN: And that in itself is a huge issue. Because this is a different business model. They have a subscription based service. They are generating revenue from people buying their product. But it isn’t enough.
Their costs are still completely outweighing the revenue. Which is, of course, the subscription based model. Which we see work for a company like Netflix. WE see work for Apple music. But it is still yet to prove to be successful in terms of profits for Spotify.
25:25 PAT: Yeah, and I think that the issue comes down also to… So you think about it that way. You have the free listeners, you have the advertising fees, so that brings in a little bit of revenue.
But I think the mass appeal, and it’s almost like they’re mimicking a bit of a best practice Silicon Valley rule, right? You get somebody on a subscription model. It doesn’t matter what it costs to acquire them the first time, because they’ll end up making that money back and more with their subscriptions. That is assuming that you do not have operating costs and people to pay out to the extent that a company like Spotify does. Even from their 5 billion dollars that they made in revenue last year, hey had to pay out three quarters of that just in royalties to the labels, producers, song-writers and artists. Like Universal, Sony, and Warner. And they control most of that eco-system.
26:12 AUSTIN: And I think of that almost as if that you’re paying your employees, right? Cause what’s really…? Is that an investment? I don’t really think so. That’s just an expense. You have to pay those people to keep your current customers happy. So it isn’t necessarily making the happier, this is just simply adding to what they expect from your company is that you’re going to provide new music.
26:33 PAT: Exactly. It’s not a value-add and the fact that you provide new music doesn’t increase the amount of users on your platform either. And it’s because the market is so saturated too. For every artist that there is on Spotify, there is an artist that is comparable talent and appeals to the same type of person, within the same genre on Apple music. Where their music is released first. Or maybe they’re… for God knows what reason… on Soundcloud. I can’t imagine why you would still want to do that, but that’s definitely an option.
27:02 AUSTIN: Soundcloud rappers. That’s the only reason.
27:03 PAT: So I think that there’s those factors that they need to think about. And going back to what we were talking about before. I guarantee you the guys that are running Spotify right now, are not used to answering to a Board of Directors that have so much unilateral say over a product that they’ve been able to customize to their liking for so long.
And what I mean by that is they have made all of their decisions to this point about the user experience internally. They can say, “I know our users and I think they would value this.”
But now you have other things to factor in. You have all the stock holders. So it doesn’t matter what’s good for the user anymore. The incentive is to drive money towards your stock holders. Because they own the company.
27:43 AUSTIN: So market share and cutting costs. These are going to be the 2 things that they are going to be promising their investors to make their company profitable. So they need to grab more market share from companies like Apple, that have their streaming service.
And then they need to cut down on the costs. And that is paying of the labels and the artists the royalties. So currently, if we look at Spotify’s average revenue per premium user–these are the people that pay for the premium service. It is a $10 a month thing. They’re bringing in about $5 of that. So they’re making $5 per $10 that each individual’s paying.
The year before that they were at $6, so they’re currently going backwards. Showcasing that the labels are wanting more money. The music industry is actually on the uptick. Currently they’ve been seeing a lot…
28:26 PAT: There’s more outlets for you to put your music on.
28:28 AUSTIN: Exactly. So they’re demanding more money and just more people listening to music is what clearly is happening for these labels to be doing this.
Spotify needs to come up with a game-plan here, because I don’t think the labels or the musicians are going to take less money. They clearly are seeing that this is the time to take more money. So what is Spotify going to do?
28:48 PAT: And this is what I think they’re play probably already is. I think that with all of this newfound capital from their IPO, they’re going to look to secure partnerships with all of the premium artist who may be already releasing their first-day music on Apple music or Soundcloud. Get them over to Spotify. No matter what you have to pay them initially. Because that’ going to help them take over market share.
You take a premier artist like a Kanye West. If you can take him off of Tidal, which was Jay-Z’s streaming platform and put him on Spotify for the release of his next album. You’re bringing over tens of millions of fans who are either going to engage in the free version of it which you can… which is fine. They’re already kind of in your funnel. Or you’re getting new paid users, which is going to be monthly subscription. It’s going to be MRR. So you secure the market share in that sense by going after a few key people you form a partnership with.
And then once you have enough of it consolidated to the point where you have the vast amount of listenership in the marketplace, unfortunately, I think that they will raise their subscription price. So that their MRR increases without their acquisition costs having to go up.
And with the higher demand of more artists wanting to put their music on these platforms, the payouts aren’t going to go anywhere. So they need to find ways to generate revenue from other methods.
I think really that’s probably what it’s going to be. It’s a little bit of that market share play at first. They may operate at a loss for a little bit here, but in order to make their investors happy and the Board of Directors happy I think that’s a must. Because right now there’s too much competition in the space.
30:12 AUSTIN: I think that’s the best in there that I was thinking of. Is negotiating with these labels to have more of a wholesale cost of their artists. When they are bringing them onto the platform to get paid. So the royalty cost needs to be more of an umbrella/ blanket cost instead of a custom/ per artist fee. Because that’s how I’m assuming you’re going to drive up your expenses a lot. If you don’t have any sort of consistency with what you’re paying artists.
So if you can get on the same team and on the same side as a lot of these labels, you can package up the new artists that they’re going to have coming in. The labels continuously sign new artists. Those artists need to get put on Spotify. And they need to get paid.
So if you already have a fee in place for these certain labels, you might be able to cut down the cost per artist to onboard onto Spotify. Thus leading to a higher amount of revenue that you’re gaining per customer of that $10.
31:04 PAT: Right. You’re netting more dollars per paid customer in that instance.
31:07 AUSTIN: Right. You’re netting more. So the profit… the revenue isn’t increasing but the netting…
31:11 PAT: But that’s important. That’s important. They could generate 15 billion dollars in revenue, but if they’re still operating at a 2 billion dollar loss, then it doesn’t actually make that much of a difference.
If they make net profit on their earnings this year, that’s when their stock holders are going to get paid out dividends. And that’s when their Board of Directors is going to be the happiest.
31:25 AUSTIN: Earnings per share will be the big metric to watch here.
31:29 PAT: Absolutely. So a few things that we’re going to be taking a look at as we kind of wrap up here. A few things that we’re going to watch with Spotify. While we’re watching its IPO trajectory here is Daily Active User count. That’s like the big, golden ticket KPI for anybody that invests in a tech company. How many people are on your platform every single day?
They’re going to be set up for success with that because the AI and machine learning that they use to customize and introduce you to new music you might not have already seen. So that’s going to be fine.
The second piece is how much market share that they can seize. So I’m interested to see what they do to differentiate themselves from an Apple Music or a Tidal or a Soundcloud.
And then the last thing that they’re going to have to do is to find other ways to cut down on some of those costs, like you were saying Austin. I think that could even be a good idea for them.
Also securing premium partnerships with artists is going to be huge. Getting their endorsement.
But at the end of the day, this is grasping at straws and we need to see a game plan out of them for them to be a viable force in the stock market.
32:25 AUSTIN: Yup. And then for the next few months, if you’re going to be into the stock and if you want to invest–think about it as there’s going to be a lot of day trading going on. So typically when an IPO does occur there’s the excitement and the push. And then it becomes a premium price. You’re going to get a stock price at a premium.
And the people that are smarter than us, and are the day-traders, this is their livelihood. They understand that. So they’re already have sold at the top. When we saw that big pop when the IPO came out. And now we’re going to enter in a little bit of volatility.
So really wait for that 1st, 2nd, 3rd, 4th quarter of Spotify’s fiscal year to truly understand what they’re doing as a company. And understand if this is truly a good investment long-term.
33:07 PAT: All right, you guys. Moving into our last segment here, we wanted to do one of our favorite, now recurring segments. It’s our 3rd time. 3rd time doing this. 33:15 AUSTIN: It’s a recurring segment and probably our most important segment, because it’s about our good friend Elon Musk.
33:19 PAT: Long-time listener Elon Musk. We call this “A Minute with Musk.” That’s all alleged by the way. We have no idea if he’s even ever heard of us. But he did make headline news again in a not so fortunate way.
33:29 AUSTIN: Pretty funny way, though.
33:31 PAT: Yeah, it’s kind of funny. So obviously April Fool’s Day was on April 1st. Sunday.
Elon Musk sent out a Tweet saying “Headline–Tesla goes bankrupt.” And then it says “Despite intense efforts to raise money including a last-ditch mass sale of Easter Eggs we are sad to report that Tesla has gone completely and totally bankrupt.”
33:49 AUSTIN: April Fools!
33:51 PAT: “So bankrupt you can’t believe it. April Fools. It should be over.”
33:56 AUSTIN: Oh my gosh. This is hilarious because I think this probably ruined every single investors Easter Sunday. They are a publicly traded company. So if you thought Tesla was the best investment you had, and then you found out they went bankrupt, well you might just be having the worst day in the history of your life.
34:16 PAT: Well, you’ve been having a bad couple of weeks if you think that Tesla’s the best investment you’ve ever made.
34:19 AUSTIN: Yeah, they did have a really bad quarter.
34:21 PAT: They had an awful quarter. And I think that…
34:23 AUSTIN: That’s why it was such bad timing.
34:25 PAT: Yeah. And that’s the whole point that these people are trying to make. They’re like, “Yeah, Elon plays by his own rules. But I think he underestimates the weight of his own words.”
34:32 AUSTIN: I didn’t tie that together real quick, but now I did…
34:35 JOHN: Yeah, the timing on that is horrible. I would put this all on Elon Musk.
34:40 PAT: Yeah, this is completely Elon’s fault. That being said though–pretty funny April Fool’s joke. I think that we can all agree on that much at least. If I had that kind of say, you gotta be kidding me…
34:50 AUSTIN: Oh man, I think this just falls in line with his personality. He sends the Roadster on the rocket with the little space man in it. And he named his flamethrower company the Boring Company…
35:03 PAT: Yeah. I feel like he just trolls people…
35:04 AUSTIN: He is. He’s really into trolling. And I think it’s hilarious. The leader of all tech right now. He’s been very innovative and then he’s just got this great sense of humor. I think it’s fantastic for the industry and just as humans…
35:16 PAT: It’s just so funny to see too how seriously investors take it. So there’s this guy Ben Callow. He’s an analyst at Robert W. Baird and Co. And they rate Tesla at an “outperform” rating, saying that it was… he said that Musk’s Tweet was brash but that he wasn’t worried about what he said. He said “It ruined my Easter dinner but at the same time it was his response. Doing something outlandish to the outlandish comments about Tesla going bankrupt.
This guy has his head on straight because everybody else was freaking out about it.
35:47 AUSTIN: Oh my gosh. Gene Munster from Loup Ventures he said, “It was not funny. Because it’s not a joking matter.”
35:57 JOE: People really fell for this?
35:58 AUSTIN: Yeah.
35:59 PAT: Yeah.
36:00 JOE: On April Fools.
36:01 PAT: Yeah, I’m sure that instead of a letter to every investor and stock holder he’s going to Tweet it out in less than 140 characters
36:06 JOE: Yeah, but if they had a horrible quarter…
36:07 AUSTIN: Yeah.
36:09 PAT: Awful quarter. Just on last Thursday the company recalled 123,000 of the Model-S sedans after they discovered that corroding bolts could lead to a loss in power steering.
36:20 AUSTIN: It’s just not the week to make jokes.
36:22 PAT: Yeah, it’s just not the week to make jokes. But if you can’t do it on April Fool’s Day when are literally allowed to do that?
36:26 JOE: And the self-driving car did hit that person.
36:31 AUSTIN: But that was Uber. He’s good.
36:33 PAT: Yeah, he’s going to be fine. That guy’s the best CEO we’ve ever seen.
36:37 AUSTIN: Even though Tesla is making self-driving cars. Not his problem. Different company.
36:41 PAT: Exactly.
That being said…
36:44 AUSTIN: I’m being extremely rude here.
36:50 PAT: Yeah, so this Tweet came out after the stock had dropped 14% since the day before the crash. And even further from its high back in June of 2017. So, yeah, might have been in poor taste. Might have been in poor judgement. But you know what Elon? We suppo rt you. Because we thought that that was absolutely hilarious. And we’re looking forward to next April Fool’s Day.
All right you guys. That just about wraps up everything for us here on episode 31 of Flip the Switch presented by Power Digital Marketing. Thank you again for joining us.
Visit our forum page. We have a forum page on Facebook. It’s awesome. We interact with people all the time on there. Comment, drop articles, have polls.
Would love to get you guys in there if that’s something that you’d like. The forum. Just hit up Austin about that.
37:30 AUSTIN: You can just go on and do “flip the switch forum.” Type that in and then request for access. And then I will approve it immediately because I’m waiting very, very… I’m just literally sitting by my computer waiting for you–the person listening right now–your name to show up.
37:45 JOHN: He’s got like an “Easy” button and it just goes “approved”…
37:47 PAT: Exactly.
37:47 AUSTIN: Seen those commercials from Staples?
37:50 PAT: Yeah, well we’re getting off topic. That’ll be next week’s episode. But until that time this has been Pat Kriedler, Austin Mahaffy, John Saunders and Joe Hollerup signing off.