Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Hello and welcome to The Money Stuff Podcast, your weekly
Speaker 2: podcast where we talk about stuff related to money. I'm
Speaker 2: Matt Levine and I write the Money Stuff column for
Speaker 2: Bloomberg Opinion.
Speaker 1: And I'm Katie Greifeld, a reporter for Bloomberg News and
Speaker 1: an anchor for Bloomberg Television.
Speaker 2: What do we got today, Kitty?
Speaker 1: We're going to talk about SEC raids and how to
Speaker 1: trade them. We're going to talk about private credit ETFs,
Speaker 1: question mark, and we're going to talk about Spotify arbitrage.
Speaker 2: Yes, excellent, sec raids.
Speaker 1: I'm a little bit surprised. Were your SEC jacket?
Speaker 2: I know I should have. I wrote about this, like
Speaker 2: amazing paper about what happens on the SEC visits a company,
Speaker 2: and I mentioned that I own an SEC raid jacket
Speaker 2: that I joke about wearing but never wear.
Speaker 1: And you didn't even bring.
Speaker 2: It in, did you know? I read about this and
Speaker 2: then reader emailed to say that an sec red jacket
Speaker 2: was his Halloween costume. That's funny, but he didn't have one,
Speaker 2: and he didn't actually know that they even existed, so
Speaker 2: he just like got a blue windpricker and like got
Speaker 2: yellow tape and put SEC on the back and wore
Speaker 2: it to like Halloween parties with the finance pro friends,
Speaker 2: to be scary. Yeah, that was a really good idea.
Speaker 2: I have a real one.
Speaker 1: It'd be kind of funny if he paired that with
Speaker 1: just fangs. That's it's the whole costume. That's cool. Well,
Speaker 1: if you used the fact that you own an SEC
Speaker 1: jacket is like a cute little setup to talk about.
Speaker 1: Maybe a tradable signal. Maybe not that amazing paper. Watching
Speaker 1: the Watchdogs, yes.
Speaker 2: Watching the watch dogs tracking SEC increase using geolocation data.
Speaker 2: What they find is that when the SEC visits a
Speaker 2: public company, that probably means there's something bad, right, and
Speaker 2: so it's a negative signal.
Speaker 1: It's not just a chat, like just a coffee meeting.
Speaker 2: In aggregate, statistically it's a bad sign And so like
Speaker 2: you get Adnorrambal returns of like negative one point four
Speaker 2: to one point nine percent over the three months after
Speaker 2: the SEC visit, whether or not there's a subsequent announcement
Speaker 2: of an SEC investigation, even if they just do an
Speaker 2: informal visit, there's some negative signal there. They also have
Speaker 2: some really fun findings about the insider trading around. Yeah,
Speaker 2: usually the sea of a company and the SEC comes
Speaker 2: and visits. Should you sell the stock because that's bad
Speaker 2: news or should you not sell the stock because that's
Speaker 2: insider trading? Yeah, the answer is most people. There seems
Speaker 2: to be a chilling effect where people tend not to sell,
Speaker 2: but like when it's really bad news, they do sell.
Speaker 1: Well, I have to say so. The stat that you
Speaker 1: highlighted was that insiders are sixteen percent less likely to
Speaker 1: sell into two weeks surrounding an SEC visit relative to
Speaker 1: periods with no visits. I'm kind of surprised it wasn't
Speaker 1: like eighty five percent or ninety percent. I feel like
Speaker 1: if the SEC was knocking on the door, maybe I
Speaker 1: would just sit tight for a moment, right.
Speaker 2: Because like, arguably that's material news, and if you're still selling,
Speaker 2: it does seem risky. But you know it's not that
Speaker 2: because like maybe they're coming to chat, right, like you don't.
Speaker 1: Know, Ye, well, maybe it's that pension for risk that
Speaker 1: got you from the SEC in the first place.
Speaker 2: Right, The causation can go their way, right, You're you're
Speaker 2: the person who's you know, they're visiting you about your
Speaker 2: insider training. Keep insider trading. Yeah, so that is interesting,
Speaker 2: but it's not as interesting as the methodology of the paper,
Speaker 2: which is like amazing. It's basically like, your phone has
Speaker 2: two hundred as on it, and like one hundred of
Speaker 2: them track your location, and ninety nine of all times,
Speaker 2: at all times, and ninety nine of those sell your
Speaker 2: location to a data vendor that then sells it to
Speaker 2: hedge funds. Right, that's what your phone is.
Speaker 1: That's all right, that's why I never turn off my location.
Speaker 1: I want the hedge funds to have that data.
Speaker 2: And the hedge funds appreciate that. Yeah, and they use
Speaker 2: it as far as I can tell, mostly to figure
Speaker 2: out what stores are getting a lot of foot traffic. Yeah,
Speaker 2: that's the main U said. This sort of thing is like, oh,
Speaker 2: there's a lot of foot traffic to this retailer, so
Speaker 2: we should buy that retailer.
Speaker 1: Not just like Katie want to just salad today and
Speaker 1: usually she goes to Sweet Green.
Speaker 2: You know, my understanding is that this data is pretty anonymized.
Speaker 2: They don't have like Katie's data. They have like you know,
Speaker 2: how many people went to Sweet Green. But if you
Speaker 2: get all the data, you can like kind of recreate
Speaker 2: who's Katie. Right. You can look at the phone that
Speaker 2: is at the Bloomberg headquarters a lot and at the
Speaker 2: horse Barn a lot. Yeah, I'm pretty sure this is Katy.
Speaker 1: It never goes downtown, right.
Speaker 2: And so what the authors here did is they got
Speaker 2: all the cell phone data and they figured out which
Speaker 2: phones belonged to SEC employees by looking at like which
Speaker 2: phones were like mostly in SEC offices. And if your
Speaker 2: phone is mostly in SC office, you're an SECM player.
Speaker 2: And then if it goes to a corporate headquarters, then
Speaker 2: the SEC was visiting that company.
Speaker 1: Well, let's just read this. You put it in the column.
Speaker 1: But for listeners who haven't read the newsletter, a smartphone
Speaker 1: is assumed to belong to an SEC employee if it
Speaker 1: is quote paying for at least twenty unique workday hours
Speaker 1: within one SEC location during the month, and the accumulated
Speaker 1: time in the SEC building is greater than in any
Speaker 1: other buildings in the respective month. I do like to
Speaker 1: imagine though, that they're tracking janitors.
Speaker 2: Maybe, but the point is that those genders are then
Speaker 2: also visiting.
Speaker 1: Maybe they're freelancing. I don't know.
Speaker 2: Okay, okay, but statistically it works out to be a
Speaker 2: useful signal.
Speaker 1: This is true.
Speaker 2: So there's so much to say about this methodology. One
Speaker 2: thing about it is I've talked a lot of my
Speaker 2: column about how the SEC gets mad at banks for
Speaker 2: letting their employees talk about business on their personal cell
Speaker 2: phones and finds them hundreds of millions of dollars. This
Speaker 2: is like SEC employees' personal cell phones providing tradable signals
Speaker 2: too well to academics, right, And I think this is
Speaker 2: very funny that the personal cell phone usage of the
Speaker 2: SAC continues to be like a funny little mindfield an
Speaker 2: agency that is finding banks for using personal cell phones.
Speaker 1: I will note that it was a pretty short time period.
Speaker 1: They were collecting data from January twenty nineteen to your
Speaker 1: A twenty twenty, so you know, a little bit over
Speaker 1: a year.
Speaker 2: But still, Yeah, the paper came out like this year,
Speaker 2: and the data is from four or five years ago,
Speaker 2: so it's not tradable in the sense.
Speaker 1: That you know, well, the data is.
Speaker 2: If you had it in real time, and like these vendors,
Speaker 2: they do sell the data in kind of real time.
Speaker 2: So like my question was, can and do hedge funds
Speaker 2: trade on this signal?
Speaker 1: Yeah?
Speaker 2: And I asked people the email if they did, and
Speaker 2: no one said they did. My impression is that most
Speaker 2: hedge funds do not try to get the data that
Speaker 2: is like can we identify Katie? Or like can we
Speaker 2: identify SEC employees? They get like how many people were
Speaker 2: in the building? Right, Like they're getting you know, aggregated
Speaker 2: data and not like trying to individual identify people. And
Speaker 2: so this is probably not a signal that anyone actually
Speaker 2: trades on. Also, it's not like so strong a signal.
Speaker 2: You know, it's like one point nine percent of normally
Speaker 2: turns over three months. That's like, yeah, it's.
Speaker 1: Like, well, I was wondering why that would exist at
Speaker 1: all if people weren't trading on it. You know, it's
Speaker 1: like a chicken in the egg thing.
Speaker 2: Why what the data?
Speaker 1: No, Like, why you would get those abnormal returns? Like
Speaker 1: why is an informal SEC visit bad? Necessarily? What was interesting,
Speaker 1: if I understanding this correctly, is that you had that
Speaker 1: abnormal performance even if no formal investigation was announced.
Speaker 2: You could tell stories, right like they're aggressive with their accounting,
Speaker 2: and the SEC says, knock it off, and they stop
Speaker 2: being aggressive with their accounting, and their next you know,
Speaker 2: earnings report is disappointing because they've stopped fudging them right
Speaker 2: right right, you know stuff like that, or just like
Speaker 2: they're a badly managed company, which is why the SEC
Speaker 2: is visiting them, and that bad management ends up affecting
Speaker 2: their performance. Yeah, but like I don't think people trade
Speaker 2: on this, lagneal, but it is interesting because heedgehones. Do
Speaker 2: you use self one location data and self on location
Speaker 2: data is like controversial, right, people get mad. You know,
Speaker 2: your phone now probably asks you like will you left
Speaker 2: this app track you which you didn't like used to
Speaker 2: do as much like now it's like Apple is trying
Speaker 2: to provide apps from tracking you unless you want them to,
Speaker 2: which you do for them.
Speaker 1: I always say yes.
Speaker 2: And you know, people have like periodic like privacy worries
Speaker 2: about these things, And if you're a hedge fund, you're
Speaker 2: putting a lot of effort into compliance. You're putting a
Speaker 2: lot of effort into making sure that you're buying this
Speaker 2: data from vendors who sort of ultimately have user permission
Speaker 2: to track their location, and that it's anonymized in the
Speaker 2: right way so that no one is going to later
Speaker 2: accuse you of insider trading or of like violating people's
Speaker 2: privacy or anything like that. And you know, you worry
Speaker 2: about the regulatory environment changing and like getting harder to
Speaker 2: use this sort of self in location data. And one
Speaker 2: thing that might cause that to happen is the SEC
Speaker 2: finding their personal phones being tracked to like create a
Speaker 2: tradable signal. The SEC might get annoyed by that. They
Speaker 2: might say, so we should cry down on these vendors.
Speaker 1: Maybe don't build your whole business on the availability of
Speaker 1: this data.
Speaker 2: Yeah, but I think that this is a big source
Speaker 2: of like alternative data for chants to actually trade on.
Speaker 2: And now, obviously don't build your business on like SEC
Speaker 2: self fund data, but nobody does. That's just going to
Speaker 2: make paper. But the academic paper that draws awkward attention
Speaker 2: to location.
Speaker 1: Data, well, I was going to say, even if no
Speaker 1: one has emailed you to say that they're trading on it,
Speaker 1: there's an ETF for everything, Like some interesting indie little
Speaker 1: issuer might be reading this.
Speaker 2: People do try to trade on SEC investigations, people like
Speaker 2: FOIA SEC investigations to sort of see what's being investigated
Speaker 2: and use that as a signal. And this is like
Speaker 2: a sort of much more real time, weaker but interesting signal.
Speaker 1: It's just still Yeah.
Speaker 2: I don't see people paying for this data.
Speaker 1: I want to see it. How much does this state
Speaker 1: of cost? We should do like the money stuff investigation
Speaker 1: and try to trade on it. It sounds fun. It's
Speaker 1: still out there. Moving on, moving on to ETFs that
Speaker 1: don't exist but might one day. At least this one
Speaker 1: has plans private credit ETF. So we were just talking
Speaker 1: about this sort of in a thought experiment type of way.
Speaker 1: How would this work?
Speaker 2: That's real.
Speaker 1: The big brains that Apollo have a plan, Apollo. Yeah,
Speaker 1: I did, the big brains at Apollo. I'm screaming. The
Speaker 1: big brains at Apollo have a plan.
Speaker 2: We're keeping all better. Yeah, they have a plan. And
Speaker 2: the plan is they're a teammate with State Street to
Speaker 2: make an ETF that is like mostly public credit and
Speaker 2: some private credit. I think, yeah, I understanding.
Speaker 1: There's many interesting things about this. I find the partnership
Speaker 1: interesting just from like an ETF industry perspective. It's public
Speaker 1: and private credit. We had talked a bit about how
Speaker 1: there was that fifteen percent limit on a liquid securities
Speaker 1: Give me the mount Levine take, because you actually haven't
Speaker 1: written about this yet.
Speaker 2: I haven't this is a podcast exclusive. Okay, So you
Speaker 2: mentioned the liquidity role, right, Like typical sec mutual funds,
Speaker 2: including ETFs I have to have none more than fifteen
Speaker 2: percent of their assets in I liquid securities, and private
Speaker 2: credit is probably an ill liquid security, probably in the
Speaker 2: sense that like you can't it doesn't. It's not like
Speaker 2: a really you know, liquid trading market. I liquid means
Speaker 2: something like we take you more than seven days to
Speaker 2: sell it without affecting the market, and we just have
Speaker 2: like an initial filing. And so I don't exactly know
Speaker 2: what they're doing, but what they've done here is they've
Speaker 2: said Apollo has a trading desk to trade private credit.
Speaker 2: Just first of all, fascinating, like that's kind of a
Speaker 2: new thing. But their trading desk is going to give
Speaker 2: firm inter day bids to the ETF. So all the
Speaker 2: private credit stuff that the ETF holds, which it presumably
Speaker 2: bought from Apollo, apollow will buy it back and they
Speaker 2: give you a bid to buy it back every day,
Speaker 2: and the ATF can sell it every day. And I
Speaker 2: think that the point of that is to satisfy the
Speaker 2: liquidity requirement, because what they say is, you know, if
Speaker 2: apollow will buy it back instantly. Then that makes it
Speaker 2: liquid and so we can fulfill the ETF rules. I
Speaker 2: think that works. It's a little cheap, it's a little weird.
Speaker 1: Well, I have to say, I'm really interested to see.
Speaker 1: First of all, we have to get at the launch.
Speaker 1: Talking to people, it seems like there is confidence that
Speaker 1: this will launch, but with any first of its kind
Speaker 1: sort of fund, there's always questions over whether the sec
Speaker 1: will green lighted. I am curious to see if it launches,
Speaker 1: how much of it actually is private credit, because you
Speaker 1: take a look at some of the details, at least
Speaker 1: eighty percent of the fund's assets will be in investment
Speaker 1: grade either public or private securities. As much as twenty
Speaker 1: percent may be allocated to high yield bond. So it
Speaker 1: could just turn into it's eighty percent high grade public
Speaker 1: debt and then twenty percent high old bonds.
Speaker 2: Yeah, there are a lot of regular stock mutual funds
Speaker 2: that are tech focused then like have one little holding
Speaker 2: of like a startup private stock. But yeah, ninety nine
Speaker 2: percent public equities. You can imagine this being that there's
Speaker 2: like a little sprinkling of private credit.
Speaker 1: Yeah. Ron Barren's funds, I mean he has at least
Speaker 1: one mutual fund that's all public and then just SpaceX.
Speaker 2: Two points with this one is it's easy to get
Speaker 2: retail exchange traded private credit exposure. It is called the BDC.
Speaker 1: Right, people find that unsatisfying, though I.
Speaker 2: Know that I don't enough. A BDC is a business
Speaker 2: development company. It's a publicly traded pot of private credit.
Speaker 1: It feels like buying micro strategy for bitcoin exposure.
Speaker 2: Though no, it's not feel like it. I don't think
Speaker 2: it does. That's what the BBC is a private credit fund.
Speaker 2: That's what it is. It's a exchange traded, publicly available
Speaker 2: fund that holds private credit loans. The difference between it
Speaker 2: and an ETF is that a BDC is closed. Then
Speaker 2: you can't take your money out. There's an arbitraged mechanism,
Speaker 2: and so it won't necessarily trade it net asset value,
Speaker 2: but mostly pretty close. I think. So I don't fully
Speaker 2: understand the need for an ETF. I think some of
Speaker 2: it is like feed driven. Some of it is like
Speaker 2: just the ETF is the popular product, and so a
Speaker 2: BDC feels weird and different than the ETF, feels like
Speaker 2: an easy thing to hold in your portfolio. I suspect
Speaker 2: part of it is like market maker driven. I suspect
Speaker 2: that like the jan Straits of the world love trade
Speaker 2: and ETFs and so like they're like, hey, we could
Speaker 2: do it private credit ETF and so there's some like
Speaker 2: desire for that, whereas the BDC is more of an
Speaker 2: orphan in like the market structure world. But still it's weird,
Speaker 2: right because like a BDC is this it's a retail
Speaker 2: private credit fund.
Speaker 1: Yeah, I don't know. It does feel unsatisfying. Well, I
Speaker 1: mean maybe because I'm totally ETF pilled, But why.
Speaker 2: Does it feel like? Tell me what is wrong with
Speaker 2: a BDC in your mind?
Speaker 1: It just feels like a proxy.
Speaker 2: It just feels not as lot a proxy. It's a
Speaker 2: pot of private credit assets. There's nothing proxy about it.
Speaker 2: It is simply a pot of private credit assets.
Speaker 1: I know I'm not alone because if that answered the
Speaker 1: desire in the marketplace. And maybe it's a misguide.
Speaker 2: Because the name is business development company. Yeah, sounds like
Speaker 2: a need a company that develops businesses.
Speaker 1: It needs a rebrand, right if you just call it
Speaker 1: a exchange would you be happier if you called it
Speaker 1: an exchange traded closed end private credit fund?
Speaker 2: Are you still just allergic to the words closed in Yeah.
Speaker 1: I mean again, like I'm ETF pilled, so I need
Speaker 1: the I need the openness.
Speaker 2: Okay, here's the other thing I want to say about
Speaker 2: this though. You know, we talked about Bill Ackman's closed
Speaker 2: then fund he should do an ETF, and I was like, well,
Speaker 2: you know, he wants long term capital so that he
Speaker 2: can make long term investments. I've written a lot about
Speaker 2: private credit in the last few months, and one thing
Speaker 2: I always say about private credit is that it is
Speaker 2: a better funding structure for making loans than banking, is right,
Speaker 2: Banks have short term funding, Banks take deposits. It's possible
Speaker 2: to have a run on bank deposits, and so if
Speaker 2: banks are making like liquid long term loans and funding
Speaker 2: them with short term deposits, that's a risky business to
Speaker 2: be in private credit. Meanwhile, Like raises money from insurance
Speaker 2: companies and it's a fairly safe funding source for their
Speaker 2: long term loans. If Apollo is offering to buy back
Speaker 2: it's private credit assets every day, like that turns it
Speaker 2: into runnable funding. If they have an ETF that they
Speaker 2: promise to buy back the assets every day, like if
Speaker 2: something goes wrong, investors can take all their money out
Speaker 2: and follow off the buio back and then have to
Speaker 2: raise new funding. So it is a much riskier funding
Speaker 2: source for private credit than like the traditional you know,
Speaker 2: insurance company, wealthy individual, whatever, like long term locked up money.
Speaker 2: So in that sense, it's very different from a BDC.
Speaker 2: R BDC's are permanent capital. ETFs are kind of runnable capital.
Speaker 1: I just got a buzz. Maybe we don't want to
Speaker 1: include this, but I just got a buzz because there
Speaker 1: was just another filing for private credit ETF. Oh there
Speaker 1: you get at like two thirty pm on Thursday for
Speaker 1: the bond blocks Private Credit Clo ETF. Reading from the prospectus,
Speaker 1: the fund is a newly organized, actively managed exchange traded
Speaker 1: fund that will invest, under normal circumstances, at least eighty
Speaker 1: percent of its net assets in private credit. Colos may
Speaker 1: invest up to twenty percent of its net assets in
Speaker 1: broadly syndicated bank loans, broadly syndicated bank loans clos, high
Speaker 1: yield bonds, investment grade bonds, and cash. So the demand
Speaker 1: at least from issuers is out there. Even know BDCs,
Speaker 1: to your very real point, they exist. They exist also
Speaker 1: it feels like there was a response. There's clearly a
Speaker 1: response from this issue or bond blocks. It feels like
Speaker 1: there was a response from Blackrock to this because people
Speaker 1: have been waiting for this. I mean, we've talked about
Speaker 1: it on the podcast before, like who's going to figure
Speaker 1: out how to put private assets in a publicly traded ETF.
Speaker 1: We know that black we know that Blackrock has ambitions there,
Speaker 1: and on Thursday they didn't announce that they were doing that,
Speaker 1: but they did announce this partnership with partners Group. They're
Speaker 1: teaming up to offer retail investors a variety of private
Speaker 1: markets through a single portfolio. They want to create like
Speaker 1: this one stop portfolio to private equity, private credit, real assets.
Speaker 1: It's not an ETF though, no, because it's not true retail.
Speaker 2: It's like a model portfolio for like qualified investors. Yeah,
Speaker 2: you need to have like, no, for two million dollars
Speaker 2: in assets.
Speaker 1: Yeah.
Speaker 2: And it's just like if you are a customer of
Speaker 2: a wealth manager, like they'll happily put you into like
Speaker 2: a private credit fund or whatever, and now black Rock
Speaker 2: will help them put you into a portfolio of private
Speaker 2: credit funds in one place. But it's not an ETF.
Speaker 2: It's not like it's not like a true retail thing
Speaker 2: you can buy.
Speaker 1: Yeah, you can't click a button and then buy it.
Speaker 1: It is interesting though, just it feels like, especially in
Speaker 1: the ETF market, there's an arms race for any white space,
Speaker 1: and here's the white space. I do think it's interesting
Speaker 1: that Apollo partnered with State Street. It does suggest that
Speaker 1: like Apollo isn't all in on the ETF industry, that
Speaker 1: they didn't want to you know, high.
Speaker 2: They don't care, I know, I know, but they want
Speaker 2: like funding for their giant portfolio of private credit. Right
Speaker 2: if State Street comes to them is like, we'll give
Speaker 2: you retail funding, they'll take it, right. They're not like, ooh,
Speaker 2: the one basis point fees on ets we want that juicy.
Speaker 1: It is interesting that they went with State Street though,
Speaker 1: I mean, State Street obviously is home to the oldest
Speaker 1: and biggest ETF, but they've kind of been slipping in
Speaker 1: the ranks. Who does States But Goldman Sachs, for example,
Speaker 1: has this accelerator platform which is like a white label,
Speaker 1: but not quite a white label that some big names
Speaker 1: have come through. I'm kind of surprised that Apollo went
Speaker 1: with State Street versus going through a white label such
Speaker 1: as Goldman's. But that's just a little bit of industry chatter.
Speaker 1: Does not it does not matter to end investors at all.
Speaker 1: Let me just check my phone. I'm sorry, everything's so
Speaker 1: stupid all the time. I'm excited to talk about Spotify.
Speaker 2: That's a.
Speaker 1: I've never thought about the economics of Spotify before we
Speaker 1: get to Michael Smith, which we might. We might get
Speaker 1: to him. He sounds like a fake person. Maybe he's
Speaker 1: a robot.
Speaker 2: Oh could be yeah, Michael calm Knuckles Smith anyway, Spotify, Yeah,
Speaker 2: I mean the way it works is like you pay
Speaker 2: like twelve.
Speaker 1: Bucks a month every month I do.
Speaker 2: It doesn't matter how much you listen to it. You
Speaker 2: pay twelve bucks a month.
Speaker 1: Yeah. I have never thought about that, and it would
Speaker 1: really suck if they did a sliding scale based on
Speaker 1: use because I listened to so much.
Speaker 2: Yeah, I mean, the whole point of it is like
Speaker 2: you don't, right, Like, the whole point of it is like,
Speaker 2: you know, it used to be paid for albums and
Speaker 2: now you pay for unlimited streaming and you pay twelve
Speaker 2: bucks a month, but Spotify still pays the artists based
Speaker 2: on how much they stream, sort of like takes all
Speaker 2: the money that it gets, yeah, and it signs seventy
Speaker 2: five percent to the rights holders, artists and record labels,
Speaker 2: and then it divides up that pot of money based
Speaker 2: on relatively how much you stream. It's not like Spotify
Speaker 2: is like we pay one cent to stream, and like
Speaker 2: if they're more streams and they expected, they pay more
Speaker 2: money thany expected. They pay a fixed amount of money,
Speaker 2: but they divide it up based on how much your
Speaker 2: songs get streamed. And so what that means is that
Speaker 2: if you are a customer and you pay twelve bucks
Speaker 2: a month and you stream music twenty four to seven
Speaker 2: from month, you will allocate more money than the twelve
Speaker 2: bucks you put in. Spotify will send more than twelve
Speaker 2: dollars to the people you are listening to. Meanwhile, if
Speaker 2: I sign up for Spotify and I listened to one
Speaker 2: song a month, Spotify will send like one penny to
Speaker 2: the artist of the song that I listened to. And
Speaker 2: once you know that, like the answer is obvious, which
Speaker 2: is like you sign up for Spotify, you know you
Speaker 2: have a computer on mute playing twenty four to seven
Speaker 2: the songs that you want to send money to, and
Speaker 2: then like you get the money.
Speaker 1: Yeah, And that's what I do money, That's what I
Speaker 1: do with money stuff. Absolutely, I have my laptop at
Speaker 1: home just listening on.
Speaker 2: Loose and I make three tenths of a penny.
Speaker 1: I make nothing. I'm doing this for fun. I'm just
Speaker 1: doing it for the good of the company.
Speaker 2: He gets all of it. There's not that much money
Speaker 2: in this unless you have a thousand computers saying it.
Speaker 2: And so there's this guy, Michael Smith who had a
Speaker 2: thousand computers which I mean actually like virtual computers on
Speaker 2: like a cloud service. Right, He had like a thousand
Speaker 2: cloud computers streaming songs twenty four to seven to send
Speaker 2: him the money. And because Spotify pays attention to this stuff,
Speaker 2: he couldn't just like stream one song over and over again.
Speaker 2: He had to set up a bunch of fake bands
Speaker 2: and have the fake bands record a bunch of fake songs.
Speaker 2: And even the fake songs, he can't just be like
Speaker 2: him tapping on a table, you know, has to like
Speaker 2: sound song like. And so he had like hired an
Speaker 2: AI company to write like AI music and it is
Speaker 2: so disappointing. The prosecutors list a couple of dozen band
Speaker 2: names and a couple of dozen.
Speaker 1: A lot of them titles, I mean, many of them
Speaker 1: are kind of cool sounding.
Speaker 2: They're so good. This is like an alphabetical list, like
Speaker 2: there's like a randomly selected bit of the alphabet. So
Speaker 2: the song titles are mostly words starting with zy that
Speaker 2: don't make any sense. But they include zygotes, zygotic, zygotic,
Speaker 2: wash stands, zime, doing zimes, zimite, zimo, fight, zimo, jens.
Speaker 2: And the artist names include Calliope, Bloom, Callous, Humane, calm Knuckles, good,
Speaker 2: calm Market, calvinistic dust. Yeah. Anyway, it's like a lot
Speaker 2: of great, randomly chosen names for fakes. But my point
Speaker 2: is that all of this stuff presumably lived on like Spotify.
Speaker 2: I say, we say Spotify, it's like all the streaming
Speaker 2: services he apparently took for money, so Spotify, Apple, and
Speaker 2: he's like YouTube. All these songs apparently lived on these services,
Speaker 2: and they all seem to have been taken down because
Speaker 2: I've been searching for them, I can't find any because
Speaker 2: like if we could play.
Speaker 1: Them, I know, like asking from the perspective of the listener,
Speaker 1: like we should be playing this music.
Speaker 2: These songs good, were they best? Were they mediocre? They
Speaker 2: were generated? By AI, so they weren't like just nothing,
Speaker 2: they were an AI trained in music. There he composed
Speaker 2: the song.
Speaker 1: So how much money did he make? That's insane? So
Speaker 1: it was about this, like when people just get too greedy,
Speaker 1: Like what if he had pretended to be a real
Speaker 1: artist and like made his own music, and like maybe
Speaker 1: I don't know, he had a hundred songs under his name,
Speaker 1: but he had all these robots listening to it, and
Speaker 1: maybe he only made a million dollars. Would that have
Speaker 1: been less detectable?
Speaker 2: I think it would have been more detectable, because like
Speaker 2: the reason he had all these songs was that no
Speaker 2: one was streaming these songs millions of times. Each of
Speaker 2: these songs was strained a small number of times, and
Speaker 2: like in the aggregate, all of his songs were streamed
Speaker 2: a lot, and he made a lot of money. But
Speaker 2: if he had just one song and it was streamed
Speaker 2: ten million times, someone might say, but what if.
Speaker 1: He had a hundred songs? You know?
Speaker 2: Like what he decided that the best way to avoid
Speaker 2: detection and to avoid getting caught by Spotify's cheating checking
Speaker 2: algorithms was to have a lot of songs so that
Speaker 2: it's spreading out among a bunch of different songs.
Speaker 1: I respect his hustle. Should I say that I respect okay, good,
Speaker 1: I respect its hustle too. All say I wish that
Speaker 1: he had actually made music.
Speaker 2: He had a robot makings and I probably I know he
Speaker 2: made music, and then he decided that it was more.
Speaker 1: Like I would have appreciated the vulnerability if he put
Speaker 1: his music online and then he.
Speaker 2: Needed thouands of songs. Yeah, he was busy running a scam.
Speaker 1: That's true. It does sound. It does sound draining.
Speaker 2: People email me a lot to be like, your math
Speaker 2: is wrong. And in fact, when like Spotify gives this
Speaker 2: money to the rights holder, like most of that goes
Speaker 2: to the record labels, it doesn't really go to the artists,
Speaker 2: and the artists are getting stewed. Fine point taken. I'm
Speaker 2: writing about this guy scam like in fact, the streaming
Speaker 2: services are worse for musicians than I implied when I
Speaker 2: read about the arbitrage. But secondly, like twenty people emailed
Speaker 2: me about Wolfpeck, which is a funk band that you
Speaker 2: might know as one of my like notes for what
Speaker 2: I wanted the money instead.
Speaker 1: Of theme song to sound like oh right now, I.
Speaker 2: Was like describing the vibe I wanted and a brilliant
Speaker 2: art director Jackie was like, oh, you should listen to
Speaker 2: this Voltpec song.
Speaker 1: I was like, yes, now we're going to see stream skyrocket.
Speaker 2: For full Yeah. Yeah. In twenty fourteen, they put out
Speaker 2: an album that was like twelve thirty second tracks of silence.
Speaker 1: And they were like that, so what you wanted our
Speaker 1: music to sound like? No?
Speaker 2: No, Otherwise they put out music that is louder. They
Speaker 2: asked their fans to stream it on Loop as they slept. Yeah,
Speaker 2: because the fans weren't paying for that, right, they didn't
Speaker 2: didn't affect them right as quiet, and they weren't paying
Speaker 2: because they paid a flat feet of Spotify. Spotify counts
Speaker 2: to stream if it's like more than thirty seconds, So
Speaker 2: you stream like twelve thirty one second songs on loop
Speaker 2: all night, then that's like, you.
Speaker 1: Know, that's great.
Speaker 2: Eighty stream right now, eight hundred streams.
Speaker 1: I'm certainly not going to fact check you.
Speaker 2: Yeah, it's like thousands streams for them, right, So that's
Speaker 2: like thousands streams that like a fraction of a penny
Speaker 2: per stream is like ten bucks or something. Not bad
Speaker 2: if all of their fans do that. They were like,
Speaker 2: we're going to put on a free concert funded by.
Speaker 1: The that's hysterical.
Speaker 2: They ended up raising about twenty thousand dollars and the
Speaker 2: album was removed for violting Spotify's terms of service. Oh,
Speaker 2: come on, nobody thought it was a crime. Somebody emailed
Speaker 2: me to say that they handed out twenty dollars bills
Speaker 2: at this free concert to thank their fans for doing it.
Speaker 2: I don't know that's true.
Speaker 1: That's so fun.
Speaker 2: Anyways, really cool. The other thing that people pointed me
Speaker 2: too is that in twenty sixteen, Nelly owed two point
Speaker 2: four million dollars in back taxes, and so there is
Speaker 2: a hashtag campaign Saved Nelly to get people to stream
Speaker 2: hot in Here some number of times that was estimated
Speaker 2: between like two hundred and eighty and four hundred million
Speaker 2: in order to raise the money.
Speaker 1: It's insane. I don't know if it were it worked
Speaker 1: to put I'm sure Nelly's fine.
Speaker 2: He's fine.
Speaker 1: Yeah, he's fine. I will say I listened to podcasts
Speaker 1: when I sleep, which got me thinking about the sliding scale,
Speaker 1: Like most of my Spotify usage comes at night when
Speaker 1: I'm asleep.
Speaker 2: Oh, I mean, people were like, is this a crime
Speaker 2: should be a crime.
Speaker 1: I know it's in the code.
Speaker 2: It's in the code, right. I mean, like there's a
Speaker 2: lot of stuff like this, where like there's a company
Speaker 2: that has some terms of service and people violate the
Speaker 2: terms of service and then people are, yeah, shouldn't they
Speaker 2: just sue them?
Speaker 1: Right?
Speaker 2: And I think here it's a little different because this
Speaker 2: doesn't actually cost Spotify any money. Spotify doesn't care. Yeah,
Speaker 2: Spotify is like, we get all this money and we
Speaker 2: set aside three quarters of it the people who own
Speaker 2: the songs, and we just don't care what happens. Yeah,
Speaker 2: whoever wants that, you know, we don't care. We have
Speaker 2: like some reasonably fair formula as a matter of like
Speaker 2: pr and as a matter of like you know, getting
Speaker 2: the record labels to sign up to put their music
Speaker 2: on Spotify, but like, they don't care. It's not their money.
Speaker 1: So it doesn't get worse for artists. Is Spotify g's
Speaker 1: more popular, that's.
Speaker 2: What compared to I don't know. I guess it gets
Speaker 2: good for artists because Spotify has more money and it
Speaker 2: sets aside a fixed fraction of that money for artists.
Speaker 2: It's bad for artists if the alternative Spotify was like
Speaker 2: buying CDs. Oh yeah, But what's really bad for artists
Speaker 2: is like if there's a lot of guys like this,
Speaker 2: that is people's reaction to the story is like, yeah, okay,
Speaker 2: here's this one guy with a bunch of bots and
Speaker 2: a very sort of sophisticated way to do this arbitrage
Speaker 2: who made ten million dollars? But like, are there hundreds
Speaker 2: of those guys? Is a lot of the money on
Speaker 2: Spotify going to people who are somewhere faking their streams,
Speaker 2: and obviously Spotify like puts a lot of effort into
Speaker 2: stopping that, and they did keep stopping this guy, and
Speaker 2: you had to go to some lengths to get back on.
Speaker 2: But you know, people are suspecious and they did extract
Speaker 2: ten million dollars from Spotify.
Speaker 1: That's so funny. That's so much money. Sounds like a good,
Speaker 1: good gig. Oh. One thing I wanted to add he
Speaker 1: paired up with that AI company in like twenty eighteen
Speaker 1: or twenty nineteen, Right, they were early.
Speaker 2: That's true. Yeah, yeah, I don't know what AI means, right,
Speaker 2: Like you can get pretty sophisticated with chenerative AI models
Speaker 2: now that will like make a song in the style
Speaker 2: of blah blah blah, but like like if you.
Speaker 1: Randomly, I do wonder like when it's together, you might
Speaker 1: have enough.
Speaker 2: To full Spotify in twenty eighteen.
Speaker 1: Yeah, that's true. I do wonder though, when AI artists
Speaker 1: are going to become big on Spotify, because I'm TikTok
Speaker 1: a lot and there's all these silly AI songs of
Speaker 1: Drake singing like Alana del Rey cover and some of
Speaker 1: them we're good, some of them sound like real music,
Speaker 1: So that'll be an interesting ethical question for Spotify. And
Speaker 1: like a couple of years, probably I wish I had
Speaker 1: a snapperod turn. That's fine, that's fine.
Speaker 2: And that was the Money Stuff Podcast.
Speaker 1: I'm Matt Levy and I'm Katie Greifeld.
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Speaker 2: The Money Stuff Podcast is produced by Anna Maserakus and
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Speaker 1: And Stage Bauman is Bloomberg's Head of podcasts.
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