Category Archives: Investment Markets

Now Spotify Is Daring To Disrupt The Investment Banking Industry

When a privately owned company decides to list its shares on a public exchange. it is expected to follow the rules.

What rules? Well, for starters, the company is expected to hire an investment bank to guide it through the legal process. The bank also organizes promotional presentations for company representatives to “pitch” to potential investors. And perhaps most importantly, the bank underwrites the transaction by placing a value on the stock and then guaranteeing that the firm will receive that value during the sale.

The underwriting guarantee can be a risky proposition for banks. But by charging lucrative fees, the financial institutions can afford the risk of a massive financial obligation if the investors pay far less than expected.

Spotify, the streaming music provider that has disrupted the entertainment industry, is about to disrupt the investment banking industry by refusing to follow these rules. What does it intend to do? And why is it so daring?

The firm is not hiring an investment bank to provide any IPO services. Instead, by using an obscure “direct listing” process that has never been attempted by an organization of its size, Spotify simply intends to notify the New York Stock Exchange that it wishes to begin trading its shares.

No bank will organize any promotional presentations. None will provide any legal guidance, and none will be paid any fees. Perhaps most notably, none will provide Spotify with an underwriting guarantee.

For Spotify, this “direct listing” gambit is a reflection of its daring management style. Namely, it seeks to disrupt entire industries by eliminating the middlemen and by contracting with stakeholders directly.

In the music industry, for instance, the firm has dared to contract with the public while eliminating CD, DVD, and vinyl retailers. And now, on Wall Street, it is daring to attempt to reach investors while eliminating investment banks.

If Spotify succeeds, two different industry sectors will be disrupted by its daring strategy. Considering the buoyancy of today’s financial markets, it may prove foolish to bet against them.

We Can Now Trade Bitcoin Futures, But Should We Trust The Cryptocurrency?

It’s here! Yesterday, the Chicago Board Options Exchange (CBOE) launched its bitcoin futures trading market. Even if you’re not a currency trader, you may still be affected by the development of bitcoin as an alternative mainstream currency.

For instance, did you know that certain Subway sandwich franchises accept bitcoin payments? Imagine walking up to a Subway counter in the near future, ordering a Veggie Delight on Italian bread, and considering a choice of paying in dollars or bitcoin. With the banking sector on board, you may be able to check your mobile phone’s electronic payment app and identify which currency would be less costly for you.

Not bad, eh? Nevertheless, you must also keep in mind that a currency is only as trustworthy as the entity that manages it. The Federal Reserve System and the Treasury Department of the United States, for instance, have been managing the American dollar for more than a century.

Bitcoin, in contrast, has no national government to manage it. Instead, the public relies on the five year old Bitcoin Foundation to:

coordinate the efforts of the members of the Bitcoin community, helping to create awareness of the benefits of Bitcoin, how to use it and its related technology requirements, for technologists, regulators, the media and everyone else globally.”

But the Foundation has never been tested at a time of economic turmoil.

Furthermore, Bitcoin was launched in January 2009 when the global economy was crashing. At that unique moment in time, a fledgling currency like Bitcoin may not have seemed like a riskier bet than the currencies of collapsing nations. But today, our global economy and its national currencies are relatively stable.

So should you trust the cryptocurrency? By all means, if you’re an early adopter, please feel free to open a small Bitcoin account and purchase an occasional Subway sandwich with its funds.

But if you’re considering a far more significant investment in the currency, you may wish to think again. Although bitcoin is indeed gaining mainstream acceptance, it is still very much a recent offspring of the Great Recession. And it hardly even begins to possess the history and the durability of the American greenback.

Tenure Investing

In the academic world, junior faculty members at many schools are expected to apply for tenure after accumulating several years of experience. If they receive it, they are awarded a relatively high level of employment security, and various perks of seniority too.

But if they don’t? To put it gently, they are “expected” to seek employment elsewhere.

Many commentators have suggested that this tenure system is a relic of a bygone era, and speculate that it may be replaced by a more contemporary business employment model. But hardly any one has suggested that it may be adopted by the contemporary business community.

Until now! A group of financial entrepreneurs is proposing to do just that. They’ve developed a plan to create a new stock market that would specialize in corporations that adopt the principle of “tenured shareholder voting power.”

So how would it work? And what purpose would it serve?

A “tenure voting” firm would reward long term investors by increasing the amount of shareholder voting power as ownership is maintained for longer periods of time. An investor who holds onto a stock for ten years, for instance, would possess more voting power than a comparable investor who has only owned a stock for two years.

The purpose of the plan would be to encourage patience and long term thinking. Like tenured academics who remain professors for a very long time, the plan would seek to develop investors who likewise remain with a firm for extended periods.

Is there a catch? In the financial world, there is always a catch. In this situation, for instance, one may feel concern that an entrepreneurial founder of a company may exploit the tenure mechanism to earn back voting control after selling it. Thus, an individual like Mark Zuckerberg could sell voting shares in Facebook, earn back voting control through tenure, and then sell again.

Thus, this approach isn’t a perfect solution to the problem of encouraging long term investment perspectives. Nevertheless, it’s an intriguing concept, and a creative application of an academic practice that no one suspected would ever be adopted by the investment community.