Slate Money: The Krautrock Edition

Date: September 30, 2017
Host: Felix Salmon
Co-hosts: Anna Shymansky, Jordan Weissman
Special Guest: Justin Kalifowitz, CEO of Downtown Music

Main Theme

This episode dives into the economics of the music industry—especially the financialization of music royalties—as well as major developments in global economic policy, with a sharp focus on German politics, the evolving situation in Puerto Rico, and their reverberations in the world of finance. The podcast offers both expert technical knowledge and lively banter, maintaining its trademark irreverent, conversational tone.

Key Discussion Points and Insights

1. Economics of Music Royalties and Mini IPOs (00:14 – 15:48)

Introduction to Guest and Topic

• Justin Kalifowitz, CEO of Downtown Music, joins to share his expertise in the business of music royalties.
• Central Story: The sale of Eminem royalties via a mini-IPO raises broader questions about music as an asset class and investment vehicle.
• Memorable banter: Felix expresses excitement about One Direction, and the panel jokes about unique artist preferences.

Eminem Royalties and Royalty Flow

• Anna: Describes the mini-IPO: Royalty Flow, a company now owning a stake in the "Bass brothers'" Eminem royalties, is offering shares to investors via a Reg A+ filing (raises up to $50 million, open to non-accredited investors) (02:12 – 04:12).
• Justin: Clarifies the distinction between types of royalties:
  • In this case, it’s master recording royalties, not songwriting royalties.
  • Master royalties come from the actual recording (mainly streaming), whereas songwriting generates thousands of smaller income streams (radio, TV, toys, covers, etc.)
    Quote:

  “There are literally thousands of unique income streams for song copyrights that don't exist for the master recording.” (03:34 – 04:12)

The Streaming Revolution in Music

• Justin: Details the industry’s transition from CDs and downloads to streaming, citing massive growth and still largely untapped global potential (06:22 – 07:59).
  Quote:

  “100 million paid streaming subscribers around the world is really just scratching the surface.” (06:53)

• Market projection: Goldman Sachs predicts the industry could reach $40 billion by 2030, up from $16 billion in 2016.

Global Markets and Piracy

• Justin: Highlights growth in emerging markets (China, India, Africa) where music is increasingly monetized as copyright laws strengthen and local companies invest (07:59 – 10:02).
  Quote:

  “There used to be bootleg CDs were a huge business in emerging markets. China’s growing super fast. India is growing super fast....” (08:24)

Investment Risks in Music Royalties

• Felix: Raises skepticism around investing in illiquid, untested offerings like Royalty Flow—typically, the show’s advice is to “run screaming.”
• Justin: Notes previous attempts haven’t stuck. Critical issues:
  • Who manages royalty collection is crucial; systems vary in modernization and transparency.
  • Reg A+ filings have lighter disclosure requirements, increasing information asymmetry for investors.
    Quote:

  “There are fundamental questions about how music royalties are collected around the world that investors should be considering.” (10:35 – 11:05)

Comparison to Bowie Bonds

• Jordan/Anna: Unlike the Bowie Bonds (a bond structure backed by David Bowie’s catalog with fixed coupons), Royalty Flow is offering equity, not a bond, which is much riskier for investors due to lack of guaranteed payouts or liquidity (13:18 – 13:56).
  Quote:

  “When you’re talking…you have no guaranteed income stream whatsoever. They don't have to pay dividends…there’s no guarantee these shares will actually be listed.” (13:20)

Transparency and Artist Reluctance

• Justin: Notes most artists prefer to keep royalty flows private, so attracting additional rights owners could be difficult for Royalty Flow due to mandatory disclosure.
  Quote:

  “Well known established artists do not want their royalty flows... public. And obviously, this upends that whole concept.” (14:03)

2. Puerto Rico: Bondholder Power Plays (15:48 – 23:18)

Context and the Prepa Crisis

• Felix: Puerto Rico’s power authority (Prepa) is in financial crisis post-Hurricane Maria. Bondholders offered a $1 billion new loan if granted repayment priority (a “debtor in possession”—DIP—loan).
• Anna/Jordan: Prepa rejected the deal, recognizing bondholders were exploiting the crisis for priority payment and favorable restructuring terms (17:01 – 20:28).
  Quote:

  “Prepa looked at this deal and said, 'no, you're just trying to game the fucking system to get paid back earlier.' This deal is not actually that great.” – Jordan (17:56)

The Real Motive and Stakeholder Impact

• Anna: Bondholders use the crisis to advance a previously rejected restructuring deal, now with DIP status giving them even more power in bankruptcy proceedings.
  Quote:

  "The creditors are taking advantage...but now we have priority. And not only that...we now can't be crammed down. We have way more power in a restructuring.” (19:51)

Larger Context

• Felix: Focuses on the core issue—Puerto Rico’s urgent need for new money, not bondholder interests.
• Anna/Jordan: Skeptical Prepa won’t find alternative funds; current offers aren’t sustainable long-term and resemble failed Greek-type “extend and pretend” debt deals.

3. German Politics, Krautrock, and the AfD Surge (23:18 – 35:56)

Political Earthquake and Scheuble’s Departure

• Felix/Anna/Jordan:
  • Wolfgang Schäuble (Finance Minister) is moving to Speaker of the Bundestag amidst the rise of the far-right AfD (Alternative für Deutschland), which now holds 13% of parliamentary seats.
  • AfD’s entry is especially significant given Germany’s postwar history.
    Quote:

  “There are Nazis in parliament in Germany...in Germany it's especially important.” – Felix (27:07)

Why is Schäuble Moving?

• Schäuble’s shift is partly to confront the challenge posed by AfD in parliamentary norms and process.
  Quote:

  “We actually need this motherfucker, like, in the Speaker’s role…” – Felix (28:23)

Coalition Politics and Fiscal Implications

• Anna/Jordan:
  • The incoming Finance Minister is likely from the Liberal Democrats (FDP), with different fiscal priorities: hawkish but more inclined toward tax cuts, less pro-EU, and potentially less flexible with Greece and other debtor states.
    Quote:

  “They're much more apt to spend in terms of tax cuts especially...they are much less pro euro and pro Eurozone in EU than shoibler.” – Anna (29:50 – 30:02)

Eurozone Impact and EU Integration

• The FDP could block further EU fiscal integration or collective action—bad news for prospects like France's Macron’s “United States of Europe” vision.
• Broader macro impact: A potential increase in German spending could soften its giant current account surplus, possibly benefiting the rest of the Eurozone.
  Quote:

  “If Germany's current account surplus comes down, then that could be good for Europe.” – Felix (32:18)

The Greek Debt Dilemma

• Panel predicts more “extend and pretend” for Greece, regardless of who holds Germany’s purse strings: sustainable deals remain elusive.

4. Lightning Numbers Round (35:56 – End)

Panelists' Numbers of the Week

• Jordan: Mentions a (corrected) 18% figure—the Obama Treasury’s estimate of the share of corporate taxes falling on workers, which the Trump Treasury tried to suppress for political reasons (36:03 – 39:13). Quote:

  "This is now... they're trying to hide evidence that maybe Treasury's own economists thought that their talking points were bullshit." (36:03–37:30)

• Anna: Cites 73—the number of days activist Lejein al-Hathloul was detained in Saudi Arabia for driving, marking significance now that women are permitted to drive (37:50). Quote:

  “This really is a big deal for them.” (38:01)

• Felix: $3 million—the annual salary top coders can now make at Chinese tech firm ByteDance, illustrating global competition for tech talent (38:16).

Notable Quotes & Memorable Moments

• Felix on investing in music royalties: "Whenever Slate Money talks about these kind of weird, illiquid offerings, we always just say no, this is a scam. Like run screaming.” (10:02)
• Justin on streaming’s global potential: “If you think about it, 100 million paid streaming subscribers around the world is really just scratching the surface.” (06:53)
• Anna on the transition of German fiscal leadership: “...this could be a big change in terms of what it means when they're negotiating with countries like Greece. But...this could be good for Europe overall.” (31:38, 32:12)
• Felix on German politics: “There are Nazis in parliament in Germany...in Germany it's especially important.” (27:07)
• Jordan (with apology): "Sorry to all listeners who've been complaining about my profanity..." (39:21)
• Felix (signing off): “Don’t speak like us, speak like, you know, Mr. Rogers.” (39:36)

Key Timestamps

• 00:14: Show intro, panel/guest introductions
• 02:12 – 15:48: Music royalties, streaming, and risks of investing in Royalty Flow's mini-IPO
• 15:48 – 23:18: Puerto Rico, Prepa debt, bondholder tactics
• 23:18 – 34:24: German elections, AfD rise, Schäuble’s legacy, Eurozone/EU implications
• 35:56 – End: Numbers round, miscellanea, sign-off

Takeaway

This episode offers a thorough, accessible (and entertainingly explicit) exploration of how music and finance intersect, the risks of new music-investment vehicles, the political-economic shakeups in Germany, and debt drama in Puerto Rico. The show unpacks complex topics using expert guests, real-world analogies, and relatable banter, always with an eye toward how these stories shape the broader worlds of money and power.