Kanye West's Billionaire Status?

Hey! Hope you had a good weekend. A few quick things:

1. In Friday's update, I didn't explain why Spotify didn't allow tipping in the first place. None of you complained or asked why, but it bothered me that I didn't offer that.Here was Spotify's reason in 2012:

"Spotify pays out straight back to rightsholders, the record labels and collecting societies who in turn pay money to the artists, musicians, lyricists and composers that they represent. So we do not pay straight to artists…labels do that. For this reason and since all our music is based in the agreements with labels we can't do anything about this... we think your idea of creating an app is very cool or maybe it is also easier to add this button in their actual artists page where they can manage their own money!"

Spotify likely kept this reasoning until now, when the virus hit and forced folks to change their reasoning.

2. Thanks to everyone who filled out this form for Trapital's consulting and advisory services. I'll get back to you shortly.

3. On a lighter note, who else watched The Last Dance documentary last night? Wild. I've always been a Bad Boy Pistons apologist, but walking off the court was indefensible. I also haven't thought about the name Carmen Electra in years. She's a true product of how fame was created in the 90s. It's crazy how much has changed in a short amount of time.

Today's Trapital Update is on Kanye West's billionaire recognition, reasons to doubt it, and Tidal's new freemium tier.

Kanye is a Billionaire (According to Forbes)

On Friday afternoon, Forbes announced that Kanye West is a billionaire. He joins his idol turned rival Jay Z and sister-in-law Kylie Jenner on the Forbes list. The 42-year-old artist felt disrespected because his ten-figure net worth wasn't declared in last July's Forbes feature. But last week, he sent Forbes confirming documents about Yeezy Inc. The article was written by Forbes' Senior Editor and former Trapital Podcast guest Zack O'Malley Greenburg.

Before I dive in, I give Zack and the Forbes' team tremendous credit. This work isn't easy, especially with Kanye. In public, West dragged Forbes for its "failure" to acknowledge him. To no surprise, there was strong shade in Kanye's direction throughout the article. The story broke late on Friday afternoon, which is generally one of the worst times of the week break a story like this. It felt like an intentional yet subtle, "take that, Kanye."

Here's the TL;DR on how Forbes determined Kanye's $1.3 million net worth:

‍ASSETS

• Yeezy: $1.26 B
  • 2019 revenue = $1.3 B
  • Kanye's cut (after expenses) = $140 M
  • 10x multiple minus 10%' = $1.26 B
• G.O.O.D. Music: $45 M ($90M * 50% haircut for illiquidity)
• Buildings and improvements: $40.5 M ($81 M * 50%'')
• Stocks: $17.5 M ($35 M * 50%)
• Land: $10.5 M ($21 M * 50%)
• Cash: $8.5 M ($17 M * 50%)
• Vehicles: $1.9 M ($3.8 M * 50%)
• Livestock $149K ($297K * 50%)

LIABILITIES

• Mortgages, advances, other: $100 M

EQUITY

• ASSETS - LIABILITIES = $1.4 B - $100M = $1.3 B

'10% rule-of-thumb haircut for private asset illiquidity

''50% haircut for illiquidity and lack of independent backup"

As a reminder, here's what I wrote in June when Jay Z was declared a billionaire:

These numbers can be overstated:

 - Data is often self-reported. Public figures have lied to Forbes and other outlets to boost their status, gain publicity, which leads to future business opportunities (e.g. Wilbur Ross, Donald Trump)

 - Liabilities aren’t always captured. Forbes applies conservative discounts to estimate, but there’s a tendency to lead with assets and revenue, and look less heavily at liabilities and cost(e.g. In 2016, Kanye West claimed to be $53 million in personal debt. A) Was that verifiable beyond hearsay? B) If so, was that ever accounted for?)

 - Numbers rely heavily on public knowledge. Anyone who’s generated enough wealth to be considered a billionaire likely has business interests the public doesn’t know about. 

Meanwhile, these numbers can also be understated: 

- Some folks don’t report all their assets or financial interests for various reasons (offshore accounts, businesses with moral/ethical conflicts, desire for anonymity) 

- Numbers rely heavily on public knowledge. Anyone who’s generated enough wealth to be considered a billionaire likely has business interests the public doesn’t know about.

In Kanye's case, the risk is that he overstates his net worth because his data is self-reported. Adidas, who manufactures and distributes Yeezy, didn't reply or verify any of these reports. It relies solely on Kanye's documents.

Are We Sure Though?

Yeezy is the biggest chunk of Kanye's net worth, but it's a difficult asset to nail down. Here's Forbes:

Yeezy is a complicated asset. West owns 100% of it. But it’s functionally tied—at least for five-plus years based on the documents we saw—to Adidas, which produces, markets and distributes the shoes. There’s also a separate apparel division that we don’t believe makes money. Last year, our sources projected the shoes would finish 2019 with revenue north of $1.5 billion (Adidas would not comment then, or now). Per recent conversations and internal documents, we believe the final revenue number ended up closer to $1.3 billion. 

Our sources told us last year that West’s agreement calls for him to receive a royalty around 15% of Yeezy revenue from Adidas.

Similar numbers were confirmed last month by the Wall Street Journal in its interview with West:

An Adidas representative declined to confirm West’s estimate, citing a confidentiality agreement. West, who says it bothers him that people don’t think of him as a successful businessman, repeated the estimate to me in February when he explained how he could afford to support so many endeavors. “The fact that Yeezy does $1.5 billion in revenue per year and the valuation is $2.9 billion means that money does not have to enter into the equation.” I later reviewed documents that reflected those numbers.

But this conflicts with what the New York Times reported last June:

In the case of Mr. West, Adidas positioned his Yeezy brand as its own category inside the company. Mr. West earns 5 percent royalties on net sales of his shoes and apparel, according to a person inside the company with knowledge of the relationship. Yeezy sales are expected to top $1.3 billion this year. A spokeswoman for Mr. West declined to comment.

For argument's sake, let's assume that the New York Times report of 5% royalties is accurate. (For the record, they are the only outlet on record with any verification from Adidas!) That would knock Kanye down from his billionaire status. He would be worth less than $500 million.

The other challenge is the 10x multiplier that Forbes used to estimate Yeezy's standalone valuation. Forbes made the right call by not using the $2.9 billion valuation that the Wall Street Journal verified. That number was derived from estimates from music royalties. But music royalties don't have operating expenses. Yeezy does! Music royalties are more comparable to EBITDA multiples, which are much higher than revenue multiples.

For context, according to research group Moss Adams, Adidas' enterprise valuation multiple trailing twelve months is 2.77x revenue, but 18.3x EBITDA. Huge difference.

Kanye has done more interviews than usual in the past month (Wall Street Journal, GQ, Forbes) because he wanted recognition even if Forbes didn't give it to him. Last month's Wall Street Journal interview was an opportunity to show that $2.9 million valuation from a trusted business publication. The GQ interview was further validation.

He may very well be worth a billion, but there's so much grey area. There's a conservative case to make that his net worth is just north of $400 million. There's a generous case to make that it's just shy of $4 billion.

To be clear, net worth measurements would be a challenge for any publication, not just Forbes. And the people who get defensive about these things aren't just big personalities like Kanye West or Donald Trump. The same thing happens outside of entertainment.

In a prior job, our organization released state rankings on broadband connectivity. Governor's offices and state technology offices took strong measures to validate their positions. Their efforts made Kanye West look tame. There were claims that our organization lacked credibility, alternative sources were used to discredit our work, and more.

Was our work 100% perfect? No. Like Forbes, we made generalizations and conservative haircuts. But we pushed ahead because it was directionally accurate.

Similarly, the Forbes Hip-Hop Cash Lists is not precise but it's correlated enough to drive discussion. Forbes rarely caves to public pressure, which I appreciate. But even in the long-fought battle with Kanye West, and the conservative measures that are taken, there's still plenty of margin for error.

Tidal's New Freemium Tier?

From Billboard:

"Tidal today (April 27) has said it will be unveiling a new free membership tier, where users can sign up with an email address and get ad-free access to Tidal’s various video content without having to pay... 

The tier does not include music streaming, which is available at its $9.99/month and $19.99/month premium and hi-fi tiers, respectively."

It's a unique move. Tidal has invested more in video content with its #CRWN series with Elliot Wilson. By moving this top-of-funnel, it can attract a broader audience. Tidal users are more passionate brand than most other DSPs do. When people watch #CRWN, praise often goes to Tidal (even though #CWRN existed well before Tidal).

But why didn't Tidal include music streaming in this freemium offering? An ad-supported entry-level option would make a lot of sense. Tidal has a passionate following. That means it should have an easier time attracting users and converting them into paid subscribers.

Spotify has reported a 46% conversion rate from free to paid customers, which is extremely high. The company claims that its podcast content has helped boost that.

From Music Ally:

“We have seen early indications that our investments in podcasts are having a positive impact on conversion of free to paid users... We have seen benefits to retention on the order of several hundred basis points, which is a material change on a retention curve, for users that engage with spoken word content relative to those that haven’t, and early data indicates that these users are more likely to convert to Premium over time.”

This could work well for Tidal too. Tidal, like Spotify and SoundCloud, is a standalone digital streaming provider. Apple Music does not have a freemium tier, but it already has a customer base through iOS devices. Apple also had enough cash and other business units to not rely solely on Apple Music for profitability. Standalone DSPs don't have that luxury.

Tidal isn't profitable yet. According to Billboard, it had 2018 revenues of $148 million and a net loss of $36.9 million. 98% of its revenue came from subscriptions. If we assume the average sub pays $5 per month (using Spotify's past numbers), then that's just under 2.5 million subscribers, which is right in the middle of Forbes' estimate of 1 - 5 million. They can attract a whole lot more with a freemium tier.

The only challenge though is that most of Tidal's strong markets are already saturated with DSPs. The best time to launch a freemium tier would have been in 2015 when Tidal launched. But the next best time is now.