The Prof G Pod with Scott Galloway - Office Hours: Spotify Subscriptions, Stock Buybacks, and Inflation

Episode Date: April 11, 2022

Scott answers a question on how Spotify will maintain its value proposition and grow its market share in an increasingly competitive streaming market. He then shares his thoughts on what stock buybacks mean for stakeholders and gives us a run-down on our current state of inflation. Music: https://www.davidcuttermusic.com / @dcuttermusic Learn more about your ad choices. Visit podcastchoices.com/adchoices

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NMLS 1617539. Welcome to the Prop G Pod's Office Hours. This is the part of the show where we answer your questions about business, big tech, entrepreneurship, and whatever else is on your mind. If you'd like to submit a question, please visit officehours.propgmedia.com. Again, that's officehours.propgmedia.com. Again, that's officehours.profgmedia.com. First question. Hey, Prof G. Deb from Toronto here. Over the past year, I've migrated

almost exclusively towards podcasts as my audio entertainment, as opposed to streaming music. Prof G and Pivot, of course, being a few hours of my week each week. I don't pay Spotify for subscription because you still receive ads in podcasts with or without a Spotify subscription. Spotify has been making a lot of strategic podcast first moves and

acquisitions the past few years. But in making this pivot and doing these moves, they lose the existing value prop that they have for subscribers, that being that the content is ad free. Whereas again, in podcasts, it is not even if you have that subscription. So other than buying podcasts like what they did with Joe Rogan and offering the podcast exclusively to its subscribers, what else will Spotify do in order to show value for podcast-first listeners? And what kind of predictions do you have around subscriber numbers moving forward? Thank you. Wow, what a thoughtful question. Deb from Toronto.

So first off, Deb from Toronto, that's such a good rap. If your nickname is Deb, it means that you're a nice, fun person to be around. No one, no one says, no one nicknames their manic depressive kid or their depressed kid. Maybe their manic kid, but no one names their depressed kid Deb. You just like, oh, she's a real jerk and a real downer. Deb, you never hear that. You're enjoying your day. Everything's going your way. When alone comes Debbie Downer. So Deb just immediately connotes that you're nice to be around and bring positivity and optimism to every environment. And Toronto, oh my God, what a great city.

Do you realize there are now, I believe there's more startups, more employees of startups in Toronto than anywhere outside of the Silicon Valley, maybe even New York. So Toronto, Deb in Toronto, what a fantastic place to be a Deb. Anyways, Spotify has about 400 million active users and it grew its users around 15, 16%. So this is a growing company. And according to TechCrunch, Spotify remains the most subscribed to music streaming service at 31% of the market. Now that share has declined from 34% in 2019 with the entry of big tech, specifically Apple and Amazon. And one of the reasons we should break

up Apple and Amazon is the best player, Spotify, hits a ceiling because Amazon can use their market power to bundle it in with other things, just as Microsoft did with Windows, et cetera, just as Apple is doing with Apple Music. I believe that's unfair competition, and those companies shouldn't be allowed to compete against single-purpose products that are better but don't have that bundling power. In the second quarter of 2021, Spotify grew 20% year over year,

while Amazon Music grew 25%, and YouTube Music grew more than 50%. And I would argue that those are both substandard services, see above bundling. So what do you have with Spotify? Spotify is, in my opinion, a fantastic service that is running up against monopoly abuse. Also, they've had some issues. I am not on Spotify. I do not distribute this program on Spotify. I love Spotify, but I was upset about Spotify's decisions not to put in place any sort of editorial control around what I felt was the spread of vaccine misinformation. I had a 52-year-old cousin

pass away from COVID late in the game. And I think that the spread of vaccine misinformation in the United States has directly contributed to a low vaccination rate. And as a result, I think there's just been unnecessary death, disease, and disability because when someone goes on a very popular podcast on Spotify and says that the vaccines alter your DNA, and that is just not true, that people believe it and are less inclined to get vaccinated and again, see above unnecessary death. So I pulled Prop G off of Spotify. Some people accuse me of virtue signaling. Fine. I don't think this is virtue signaling because quite frankly, our podcast was growing like a weed and our growth has been flat for the last three months. Why? Because we are no longer distributing on Spotify, which is a big distribution

channel. Having said that, I think it's a fantastic service. I get why people love it. What you're going to see at Spotify over the next couple of years is the same thing you're going to see across the entire streaming ecosystem. And that is it's going to get harder and harder to show the types of numbers and growth. Why? Because there's been an overinvestment. It's not as bad in music. There's a few players there. And granted, that investment is probably billions or tens of billions versus the streamers and video, where they have $140 billion in original scripted content coming online this year. That is just not sustainable. But across the massive move to streaming media, it has inspired a stock price movement mostly on behalf of Netflix that has inspired the entire market to fund this massive investment in streaming from both new and traditional players. The result,

this is Florida real estate in 1999. It's just been driven up way too high, or maybe it's dot com stocks in 1999 and Florida real estate in 2007. There's just too much money's gone into it, and there's going to be a shakeout. So they're going to have to find new sources of revenue, and they're trying to kind of have their cake and eat it too, or thread the needle between a free and a paid service. So I always joke that I have ad-supported Pandora in my home in New York because I can't figure out how to install Apple Music. And whenever I have someone over, I think, you know, how cool is it that I have ad-supported Pandora? That's literally outing yourself as the lamest person in the world when there's an ad from, I don't know, some sort of software company in the midst of your music. But anyways, kind of the hybrid, whether it's Roku, I don't know, some sort of software company in the midst of your music. But anyways,

kind of the hybrid, whether it's Roku, I think even some of the HBOs contemplating ads at the beginning ends of programming. These guys are going to have to come up with new revenue sources because there aren't enough credit cards, much less users who are willing to pay another 5, 10, 15 bucks a month for another streaming media service. So I think their growth is going to slow. I do think they will continue to be a growth company. And I hope that Lena Kahn and Tim Wu do their job and break up Apple and Amazon or Facebook, or at least regulate them and not let them compete or put these companies out of business. Think about the disadvantage that Spotify is at. They have to pay a 30% tax to Apple for anyone to download Spotify in the app store, right? Think about that. Think about the advantage that Apple has.

They get 30% of Spotify's revenues to reinvest in their own music. They also control the distribution channel, so they can maybe forget to ship programming tools for the latest update of iOS, which is what Spotify has accused them of. So it is difficult to be the disruptor when other people control the rails. And Amazon controls the speakers, and Apple controls the handsets. So what do I think of Spotify? An amazing company that is going to run up against slower growth at the face of one fatigue in terms of overinvestment in the streaming space, and also competing against monopolies that control the distribution. Deb from Toronto, go Leafs.

Thanks for the question. Next question. Hey, Prof G. This is Rick calling from St. Louis. I saw that President Biden was putting in place or at least proposing some new rules around stock buybacks. And it got me thinking a question I've had for a long time, and I've asked many finance professionals, why do companies do stock buybacks? And this may be a better question for Aswath Damodaran, your colleague, but it seems to me that if you're

doing a stock buyback, that meant that you've run out of ideas and aren't going to invest in R&D for your company. And as a shareholder, it tells me, well, if we're not doing R&D, then give me the money as dividends. I understand that stock buybacks are a tax-advantaged way of doing so because it bypasses a capital gains tax occurrence because the value of my stock presumably goes up. It also seems like kind of a backhanded way to increase earnings per share without actually increasing earnings. So anyway, I didn't know what you thought of stock buybacks as a finance strategy for a company. It just seems like a bad deal for investors to me. Thanks for the question.

And you're right. Aswath Damodaran is the best person to answer this. I'll do my best, but I'm going to give you sort of the rich little impression of Aswathamodaran is the best person to answer this. I'll do my best, but I'm going to give you sort of the rich little impression of Aswathamodaran. So effectively, share buybacks are kind of a form of dividend or their way of returning capital to shareholders. And there is a tax advantage. When you buy back shares, fewer shares, more earnings across fewer shares, which increases earnings, which increases the stock price. And unless you sell the stock, your gains are deferred. Whereas if you increase the dividend, you're, one, going to be taxed on those dividends. And also, when you set up a dividend, you create an expectation that that dividend is always going to be there. And it sends a very strange signal when you cut dividends. So,

I think companies are more apt to do stock buybacks. In addition, you have a natural increase in the number of shares because of employees, because of stock-based compensation or acquisitions, you issue new shares. So to on a regular basis to reduce the number of outstanding shares versus just always increasing kind of makes sense. Also, there is a life cycle to companies similar to biology, and some companies are mature and spending off cash, and quite frankly, maybe don't have the same growth opportunities they used to. And while I agree with you that it's a little bit throwing your arms up in the air and say, we don't know how to put this money to work, that's kind of the definition of a mature company. It's, well,

okay, it might be just adult supervision to say, the best thing we can do with this cash flow right now is to buy back stock instead of spending it and wasting it. So it depends on the stage of the company. Share buybacks are controversial. What is really unusual is when you pull a restoration hardware and you issue a billion dollars in debt. I don't know the exact amount of debt they issue to buy back stock. That's really kind of levering up, if you will. What doesn't make sense in my view is that I think when you do buy back shares, you should be precluded from government bailouts. If you had the cash flow on the balance sheet and used it to buy back shares, thereby increasing the share price such that the compensation of

executives would go up, and then you end up a few months later with a pandemic or some sort of exogenous blow, which happens. The only thing we know about unpredictable events is we can predict they're going to happen. So when an airline gets hit with a pandemic and says, oh, we don't have any cash, we need a bailout, or we're going to have to lay people off, well, you've been spending a lot of money on share buybacks. I think it immediately disqualifies you from ever getting any sort of, or not ever, but within a certain amount of time, getting some sort of bailout. Aswath would tell you that a lot of companies that are seniors keep trying to act like teenagers or younger people and get Botox and try and go acquire a younger company or the equivalent of marrying a younger spouse to feel younger again, and that companies need to stop acting like teenagers and act like adults and recognize that maybe this is not a growth business anymore, but a mature business, and we can return capital to shareholders. And how you return capital to shareholders, whether it's dividends or stock buybacks,

is a different conversation. But I would argue that stock buybacks, there is a place for them. Have they gotten out of control? Does it reflect the corporations at all-time highs in terms of profitability, where we have income inequality, where we have maybe a lower R&D. Apple spends less on R&D than I believe IBM did. So, to your point, there may be additional, or there may need to be disincentives and incentives that encourage companies to invest in R&D or to, I would argue, we need to raise corporate taxes again. We need to go back to where they were, that they're paying too little tax and all they're doing is buying back stock, which again is another transfer of wealth from the Commonwealth

and lower income people who don't own stock to shareholders. In general, almost every decision we make in America is about moving more and more capital to the shareholder class, whether it's lower taxes on corporation, whether it's keeping minimum wage low, whether it's increasing the compensation of the people who have shares, senior management, whether it's trying to figure out a way to tax advantage shareholders. Everything we do is like, let's take people who own shares and try and make them richer. And this is part of that. But I don't think, I don't know, other than some mild maybe tweaks in the system, you want to do away with share buybacks. Have they gotten out of control? Yes. As we reflect poor tax policy, we should be taxing these companies more. We should be encouraging R&D. For example, it's less expensive for a company to invest in robotics than it is in humans because you have to pay payroll taxes on a human, whereas that robot isn't taxed. So there's a lot to look at here, but the share buybacks are an effective way of returning capital to shareholders. Thank you for the question, Rick, from St. Louis. We have one quick break before our final question. Stay with us.

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Welcome back. Question number three. Hi there, Scott. This is Brian Reynolds calling from just within sight of the cold, cold beach today here in Sandy Hook, New Jersey. Recently, I've been looking for some commercial property, and that has gotten me thinking a lot about inflation and the Fed. Now, look, I accept the current inflation, the jump in it is fueled by war and pandemic, but isn't this thrashing around also just overdue? For decade after decade, we've been able to prop up growth and productivity by adding more people to the labor pool, then treating them with greater equity and better pay, then by computing power, then by technological innovations with things as simple as spreadsheets, and then most recently through cloud and platform technologies. And all of this just cuts against the otherwise normal correction in having some inflation some of the time. Now though, and again, this is all

pandemic driven, I get that, we are seeing the largest cohort ever leaving the job market leaving fast as baby boomers retire ever more quickly to avoid running into other human beings. Aren't we due for a long term inflation rise as we run out of easy ways to prop up productivity while we lose tens of millions of the most highly paid workers? Thanks for your thoughts. Brian from Sandy Hook, that's a thoughtful question. And this is one of those times, especially the last question, this question, I wish I'd read the questions before. So I purposely don't read these questions before, hoping to have a more raw and authentic response. But then what you end up with is wishing you'd done a little bit of

research. Anyways, inflation at its core is too much money chasing too few products. This current bout of inflation is both supply and demand driven. It's driven on the demand side. We probably overdid it with the stimulus. One in three dollars in circulation have been printed since the pandemic. So we have a lot of cash chasing products. In addition, we have the chaser of fewer products, specifically supply chain. It takes six months to get a sub-zero refrigerator. It takes eight months to get that window. Try and build a house right now. So as a result, when you have too few products, they can command much higher prices. It's been a deflationary environment for the last 20 or 30

years. So that manufacturer of windows is like, oh my God, I can raise prices. Well, watch me raise prices. This has been a long time coming. And not only that, everyone thought the supply chain issues would be cleaned up by then. And it ends up there's a ripple effect and they keep getting worse and worse and worse, at least according to people I speak to in the construction industry. Why is it more, in my opinion, a function of demand and overdoing the stimulus? If you look at Europe where they have the same supply chain constraints, inflation isn't as bad because they didn't overdo it on the stimulus side. I believe that the $7 trillion stimulus was too much. And it's unpopular to say that because you sound unfeeling.

What I would have done had I been king of the universe or specifically president, I would have taken that $7 trillion, reduced it to $4 trillion, taking the lower medium income earning households in America, about 120 million households, 60 million, call it $4 trillion. You could have given $75,000 to every household in America that was in the bottom half. So let's say made less than $50,000 or $60,000 a year. I think that would have done a lot more for the economy. 85% of people who received stimulus said they weren't going to spend it. So why on earth were we giving money away to people who didn't need it? It ended up in the market. What happened in the market? We saw unprecedented gains in stocks. Who owns 90% of stocks? The top 1%. And the wheel spins, my friend. This was overdone. We should have given money to the people who needed it. We shouldn't have tried to hold onto jobs that were going to go away anyways. This PPP program

was ridiculous. Who is the millionaire next door? He's the guy that owns three car washes or four dry cleaners. The wealthiest cohort in America is small business people. So the notion that there are more structural issues around inflation, around productivity, I sort of see that. I think frontline workers are finally demanding that their wages catch up. They have literally had wage stagnation for 30 or 40 years. CEO compensation in 1965,

CEOs made 21 times what the average worker made. Now it's 350. 350. Think about that. And what's happened since 2009? The NASDAQ has quintupled. Inflation is up 30% to 50%. I don't know what it is now, given the last couple quarters. And minimum wage has exploded from $7.25 to $7.25. So frontline workers have had it, and they are quitting in droves, which drives up inflation. Now, the whole panic around having to pay people more, I think, is a bit overdone. According to the census, the baby boomer generation accounts for 73 million people. By 2030, all boomers will be at least 65.

The share of working Americans over age 55 dropped six percentage points when the pandemic began, hitting 33% in March and April of 2020. During the boomer generation's first 15 years in the workforce, U.S. GDP per capita grew about 35%. For millennials, now the largest working cohort, economic output increased less than 20% in the same amount of time. Productivity and pay used to climb together, but lawmakers dismantled policies that ensured their mutual growth in the late 70s. And since then, productivity has grown three and a half times as much as pay. Put another way, economic growth has slowed over

the last 40 years and become more unequal. So what you've had with robotics, what you've had with the free flow of capital, what you've had with the defenestration of unions is that as the economy becomes more productive, if you're able to keep wages flat, you have this massive surplus of economic value. And most of that economic value has leaked to the shareholders or has gone to the shareholders. And that's okay. There needs to be a balance. There's always a war or if you will, between our tension between capital and labor. I would argue capital was on the wrong side of that tension. And in the seventies, shareholder returns were shitty. And finally shareholders said, we've had enough.

And they started taking over companies. Shareholder activism popped up and started saying, you need to cut costs. And even if it means firing people, you need to start treating your shareholders as if they're the owners of this company and deserve a return. It has probably swung way too far. And every conversation, or not every conversation, but a lot of conversations in boardrooms are about automation, which is Latin for fire people, so we can return more money to shareholders. Or even pay our people not very well. Why? Because we can. So I think it's about time that people caught up. Now, inflation, a little bit is good. Inflation, to a certain extent, creates new winners and new losers. Why?

Because every time you raise prices, I was on the board of Panera for a little while, and every time we raise prices, you're giving consumers the opportunity to say, wait, they raised prices, I'm going to reevaluate the purchase. And this is an opportunity for people to choose to continue spending money on that product or to go somewhere else. So inflation creates more churn, if you will. The problem is when the cost of goods outpaces wages, and then you have purchasing power go down. That's when things in prosperity, that's when things get ugly. I have friends from Argentina that I had lunch with on Sunday. By the way, lunch with Argentinians is four hours long and basically ends when we run out of wine and beef. A little bit of heaven. They'll have four hours in heaven called lunch with Argentinians. Anyways, gosh, those people love to grill and drink wine. But that's not my

point. My point is the last time I asked them what the Argentinian peso was at, and it was maybe a year or two years ago, it was 60 pesos to the dollar. Now it's 200. So a lot of people have had their savings wiped out. Their purchasing power just can't keep pace. And then what you end up with if you're not careful with inflation is this 70s-inspired psychology where people think, as soon as I get cash, I need to spend it because things are only going to go up in price. That just creates tremendous hardship because typically, as is always the case, it's poor people who get hit the hardest because oftentimes inflation has a tendency to crowd around the essentials they cannot avoid. Food, energy, transportation, and their purchasing power and prosperity just gets the shit kicked out of it. I believe the productivity, technology, redoing some of the kinks in the supply chain should bring inflation down. What it's a race against is the cementing of a psychology where once somebody gets cash, they immediately want

to get through because they think prices are going up. They go to the gas station and fill up right away. They go to the store, they start hoarding things, which takes the prices of products up. And basically all vendors or manufacturers or suppliers feel like they can massively increase rents. You want to talk about inflation. Supposedly one and two bedroom apartments across the nation are up on average between 20 and 28%. So if you're not increasing your wages 20 and 28%, your purchasing power, your quality of life has gone down. So inflation is frightening. And we're looking at several interest rate increases because Jerome Powell, who is a student of Volcker, who took inflation by the horns and wrestled it to the ground in the late 70s and 80s and is credited with effectively turning around the economy and creating incredible growth by showing that kind of discipline. You got to take the economy down. You got to make people's credit cards,

mortgages, and auto loans more expensive so they stop the psychology of thinking, well, I'm just going to spend more money and take inflation down. So we are probably, if you look at most economic historians, the only way you fix inflation is to probably bring, or these levels of inflation, is to cool the economy, which is bad for the economy. But I still think that we're going to get this under control. If you look at the bond prices, they believe that inflation is probably still transitory. But we'll see. But gosh, this feels like we should have had Aswath Damodaran on to talk about share buybacks and inflation. A little bit of inflation is a good thing.

It creates churn in the economy. It creates moments of evaluation for consumers. It's when the psychology is to the point where cash no longer has any credibility and people just feel like they've got to buy, buy, buy today because the price of bread is going up tomorrow. Then you end up with the type of inflation that destroys people's quality of life or their purchasing power. Thanks for the question. That's all for this episode. Again, if you'd like to submit a question, please submit a voice recording by visiting officehours.propgmedia.com. Our producers are Caroline Chagrin and Drew Burrows. Claire Miller is our associate producer. Thank you. quick note before we sign off. Our newsletter, No Mercy, No Malice, has been nominated for a Webby Award in the category Business, News, and Technology. If you are inclined, please give us some clout and go vote for us by heading to vote.webbyawards.com. Again, that's vote.webbyawards.com. Throw me a bone. Give me a Webby. Daddy wants a Webby.

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