Hi-Tech Industry: Making Money Online With

Even the long fawning UK press is now saying what any startup who has tangled with the music industry has said all along: Spotify will not be able to launch its free any-song-you-want-to-hear-the-second-you-want-to-hear-it service in the US. The Telegraph is reporting that at the last minute the labels demanded too much upfront cash, killing a hard negotiated potential deal.

This is sad, but not a surprise. Despite all the reasons consumers would love it and labels should be empowering a rival for iTunes, the labels are in defensive mode and have never been rational when it comes to these things. My issues with how Spotify has handled this aside, I actually didn’t want to be right on this one. It’s a sad day for users.

But this will be the interesting thing to watch: Does Spotify just roll these we’re-definitely-launching-in-the-US assurances forward to 2011, the way the company has the last two years or does it pivot, and focus on building a profitable site for Europe and other less guarded pockets of the emerging world? In the Telegraph link above an unnamed source says the year of brutal negotiations has forced Spotify to “stop and think about whether it can afford the move to the US and indeed whether it is worth it,” while the article quotes a Spotify spokesman as saying the negotiations are “on-going.” Oh, Spotify.

Here’s my advice: Pivot. Spotify has spent two years, and undoubtedly plenty of money and focus, fighting what was always a Don Quixote like battle to make the US labels listen to reason. This is the same industry who sued their users. It was a valiant effort, but it didn’t work. We can argue why they should back Spotify all day long, but the last two years has proven that they are just not going to listen without Spotify having to make some major concessions.

I think Spotify should walk instead of making those concessions. No matter how hot of a startup you are, money and time are exhaustible commodities. Spotify should start directing them at challenges elsewhere until there is enough of a sea-change in the US music market that labels see reason. Giving into the labels’ demands isn’t the answer. Instead, Spotify should retreat, build in other countries, perfect its model, get to profitability, and then come back to this market when the labels are weaker and Spotify is stronger, boldly proving cynics like me flat wrong. Use your international headquarters as an advantage, not a liability.

Spotify board member Klaus Hommels told me in an interview late last year that he believed Spotify may be the venture industry’s last-ditch effort to build an online music company. (Other than Pandora, of course, the online music company with nine-lives that finally won the right to exist.) He told the labels in negotiations that if they opted instead to drain Spotify’s venture cash and leave it for dead the way they have to so many others, they may never get another hot upstart to back. And that would resign them to an Apple dominated world.

He may be right. So why not play the long game, instead of the short one?

(Note: Don’t worry, I’ve put two dollars in the TechCrunch Pivot/Swear Jar.)

My guest on Hedge Fund Radio this week is penny stock trader and Internet entrepreneur, Tim Sykes. Every once in a while I run into a natural born trader, someone who crawls out of the crib quoting options spreads, price earnings multiples, and book values. His first spoken word was “Sell!” While other kids were practicing their ABC’s, Tim was pouring through prospectii.

During his college years, Tim skipped classes and turned a $12,415 Bar Mitzvah gift into $1.65 million by trading the market from his dorm room. By the time he graduated from Tulane in 2003, he was already running his own hedge fund. Barclays Bank rated it the number one short bias fund during 2003-2006.

Tim argues that if you cut through all the hype and manipulation in the penny stock market, it is clear that there are huge opportunities on the short side. Most of the companies trading there are frauds, and most will fail. Mini Enron’s and mini Madoff’s abound.

Defined as trading under $5 a share, these stocks are purchased mostly by individuals desperate for “get rich quick” success. Promoters buy lists of email addresses from major online publishers, sometimes paying millions of dollars, to launch a never ending onslaught of “pump and dump” schemes. Email barrages and Twitter spam have replaced the dinnertime telemarketing calls and junk mail of yore.

The SEC is so inundated with tips on Madoff copycats and competitors ratting out each other, they don’t have time to pursue gripes about $1,000 losses emanating from penny stock scams. It’s like expecting the FBI to pursue shoplifters of 99 cent items from Seven Eleven stores.

Some of the claims made by these bogus IPO’s boggle the imagination. Tim’s favorite was one company’s efforts to promote vitamins infused with stem cells. Another offered a solar spray that turned you house into an energy source. Then there was the BP Gulf oil spill that threw up innumerable crude eating forms of algae. As for my own experience, I’ll never forget the aquaculture farm in the middle of the Saudi Arabian desert. To separate out the obvious rip offs from the legitimate companies, Tim spends hours a day gleaning through voluminous SEC filings, some of which are blatant cut and paste jobs from earlier failed floatations.

Even though most of these companies are fake, prices can run away to the upside, wiping out the early short sellers. So some risk control discipline is required. When a stock truly rockets, “buy-ins” of shorts can also be a problem. A few hundred penny stocks are launched each year, but only about five a month catch on fire. And remember, Apple (AAPL), and True Religion (TRLG) jeans were once penny stocks.

To avoid being taken to the cleaners by unscrupulous con men, Tim offers some very basic advice. If it is too good to be true, it generally is. It also helps to read the SEC filings, which can be obtained online for free.

Tim claims to have a success rate with his short strategy of 75%, which has delivered a 56% return in 2010, proving he still has the golden touch. His problem is that the strategy is not scalable, and can only be executed with a small amount of money. No mega hedge fund for him.

That’s why Tim has turned to online education instead of ramping up a big hedge fund. Today, he is offering several subscription newsletters, trade alerts, chat rooms, along with a DVD course on making money in the penny stock market at his website at http://www.timothysykes.com/ .

To listen to my highly informative and entertaining interview with Time Sykes on Hedge Fund Radio, please click here at http://www.madhedgefundtrader.com/december-22-2010-time-sykes.html .

To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.

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Thursday, January 6, 2011

Making Money Online With

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