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Direct Listing: Disintermediation Lives!

Or: Here, Spot!

by Shlomo Maital

 

   Ernest Hemingway hated big pretentious words, called them “two dollar” words, and preferred two-bit words in his writing. And it was very effective.

   I agree. Except for this one exception.   Disintermediation.   17 letters!   It means, removing mediation, go-betweens.   Go-betweens clip coupons, take a slice of the money – a big slice – and run. Israeli farmers get 3 shekels a kilo for avocado, retailers sell them for 18 shekels a kilo. Guess why!?

     The Internet is the great disintermediator. It can link people who need rides with those who can offer them.  Or people who want to buy anything with those who want to sell anything – directly.   Without anybody in between.

     Here is the latest example of disintermediation – but not via the Internet.

     Spotify is a music streaming platform, developed by Swedes, and launched in 2008. It is available widely, has $5 b. in revenue, employs 2,960, has raised $1 b. in venture capital, and has 157 million monthly users. Five out of 8 regular users are young, between 18 and 34.

     Its market cap is $29.5 billion.

     Spotify thinks different(ly). On Feb. 28 2018 Spotify (NYSE symbol SPOT) shares were listed on the New York Stock Exchange. But NOT, not as an Initial Public Offering. Rather, as a DPL Direct Public Listing.

     What’s the difference?

     IPO is a sale of new shares, by a company, on the stock exchange, to raise capital.

     DPL is simply a listing of existing shares, no new ones, not with any intention of raising capital, but simply making shares ‘liquid’ and enabling those who wish to sell ‘existing’ shares on the stock market.   There are no intermediaries, investment banks, underwriters, banks, nobody to clip coupons. Direct from SPOT to you.   Here, Spot! Good boy!   Sit.

     The NYSE stock exchange has far less stringent requirements for DPL than for IPO. DPL is mainly designed for smaller businesses.   But SPOT saw the opportunity. Spotify does not need more capital (it can raise all it wants, at any time). It would like to be listed, and permit those who want to cash out (after a whole decade!) partly, to be able to do so. Hence, DPL.

     DPL is disintermediated. And the trend may catch on. This could be a disruptive technology for Wall Street. Ever since Netscape did its IPO in 1995 and saw its shares soar by ten times, Wall St. has cashed in on IPO’s. The resulting bubble led directly to the 2000-2001 crash that did much damage. DPL does not have the same ‘bubble’ potential – because it simply lists existing shares, without any increase in their supply.

   Of course, those existing share prices could crash too – but somehow it is less likely for a balloon to burst when no air is added (i.e. no more new shares), than when you have a whole bunch of greedy enthusiasts pumping more and more air into it.

     So, Hemingway – OK to say, disintermediation? Or, if you insist:   Dis   …. Inter …… Mediation.

Here, Spot(ify)  !  Sit!  Lie Down!  Good Boy!   List.  Direct.  Well done! 

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Blog entries written by Prof. Shlomo Maital

Shlomo Maital
August 2019
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