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Spotify saved the music industry. Some thanks it is getting: Artists skewer the streaming giant, a record label has sued it, and Apple calls it a freeloader.

Fans on Wall Street, however, see a more harmonious future when Spotify Technology (ticker: SPOT) dominates not just the music industry, but all of audio.

CEO Daniel Ek “has been saying to us for years that audio is far too small relative to seeing (10% of the value, at most) and doesn’t reflect either time spent or the troubles of internet privacy and discontent,” says James Anderson, head of global equities for Baillie Gifford. “The next generation listens more than it looks.” Baillie Gifford is the biggest institutional investor in Spotify, with a 10.4% stake.

Investors love Spotify because it checks so many boxes: a fast-growing, youth-focused, cloud-operated, subscription-based music streaming service with a visionary founder. And Spotify is now investing heavily in podcasting, a nascent business whose U.S. revenues are expected to more than double, to about $659 million from 2017 to 2020.

That potential is why investors value the company at $25 billion, more than the annual revenue of the entire global recorded-music industry. Bullish analysts such as RBC Capital Markets’ Mark Mahaney think that Spotify can be the next Netflix (NFLX), an underdog that outmaneuvers all the tech giants.

A year after Spotify first listed its shares on the New York Stock Exchange at $165.90, investors are debating whether it is indeed the next Netflix or a jukebox that doesn’t get to keep most of its quarters. Spotify’s stock has climbed and plunged more than Mariah Carey’s voice on her hit “Emotions”—from a high of $198.99 to a low of $103.29. It’s now at $140.

Wall Street was surprised in February when the company projected that its gross profit margins would fall to 22%-25% in 2019 from 26.7% in the fourth quarter of 2018. Analysts have more than doubled their estimated loss for Spotify this year, to negative $1.48 per share, and their timeline for its projected profitability keeps fading into the distance. A year ago, Wall Street was convinced that Spotify would be reporting annual profits by 2020. Since then, analysts have pushed expectations back to 2021. Estimates range widely, from a gain of $3.66 to a loss of 95 cents.

Without earnings, Spotify is difficult to value. Its price-to-sales multiple of 3.4 times isn’t outrageous for a growing tech company. It’s less than Grubhub (GRUB), for instance, but Grubhub is profitable.

Spotify might well end up being as indispensable to an investor’s portfolio as it is to a teenager’s phone. But for that to happen, investors need to believe that the music industry’s underlying structure will change radically in the coming decade, and that the tech giants that are competing more aggressively with Spotify will lose interest. Don’t bet on it. At current prices, the stock’s potential reward isn’t worth the risk.

Spotify’s revenue is rising, and it has more listeners—96 million paid subscribers and 207 million monthly active users—than any other music service. The problem is that its costs to license that music are high, with almost 70% of its revenue going toward content costs. There is little evidence it can reduce those costs anytime soon.

“Spotify’s business model at this stage is really tough because the bulk of the revenue they’re generating goes to the labels and the artists,” says David Marcus, CEO of Evermore Global Advisors. “While [the company] has a humongous valuation, they now have to figure out how to get a bigger piece of the pie.”

The largest slice of the pie goes to the three largest music labels: Vivendi ’s (VIV.France) Universal Music Group division, Sony ’s (SNE) Sony Music division, and privately held Warner Music Group.

“The place to be at this stage is with the content,” Marcus says. His firm owns a stake in Vivendi, but not in Spotify.

The labels’ music libraries get more valuable as more people pay to access them. While Spotify is the one hustling to persuade millions around the world to pay for streaming music, the labels are the ones hearing ever louder “cha-chings”—whether you’re streaming “Money” by Pink Floyd (Universal), “Money” by Cardi B (Warner), or “Mo Money Mo Problems” by Notorious B.I.G. (Sony).

The music industry was singing a sadder song in 2006, when co-founder Ek formed the company in Stockholm at age 23. Napster’s music file-sharing system had destroyed the old business model. Young people downloaded gigabytes’ worth of music for free, and revenues from recorded music tumbled to $19.6 billion in 2006 from $25.2 billion in 1999. Sweden, thanks to its lax copyright laws, was on the frontline of that download revolution when Ek came of age. He briefly ran a company called uTorrent that enabled file-sharing.

At the time that Spotify started, iTunes was ascendant. By 2009, digital purchases had passed physical sales as the top way of buying music. With iTunes, people could buy individual songs for 99 cents—no more shelling out $15 for an album. During the late 2000s and early 2010s, people spent nearly twice as much on singles as they did on full albums, according to the Recording Industry Association of America. The new economics were even worse than the old ones, and music industry revenue kept falling until bottoming at $14.3 billion in 2014.

The labels had an incentive to encourage competition among music distributors. So even though Spotify was a tiny start-up housed above a coffee shop in Stockholm, Ek was able to get meetings with them. As an added sweetener, Spotify sold the labels 18% of the company’s equity at attractive prices. The deal was a huge boon for the service because its most important suppliers now had a literal stake in its success.

Artists were not as sold. One recent survey by Digital Music News put Spotify’s payout rate at 0.4 cents per stream. That paltry rate translated into just $12,231 for cellist Zoë Keating, even though her songs had been played 2.25 million times by 241,000 people in 2018.

Prince compared selling music over the internet to “carjacking.” Taylor Swift pulled her music from Spotify in 2014, and in an op-ed article in The Wall Street Journal lumped streaming with piracy.

Ek met with musicians to try to convince them he wasn’t the enemy. Often, it worked. Swift returned to Spotify in 2017 and even released a music video exclusively on the service.

Patrick Carney, drummer for the Black Keys, initially fought the trend, criticizing Spotify and holding his album off the service. But after meeting with Ek, Carney was assured that Spotify isn’t the biggest problem in an industry “designed to confuse the living crap out of everybody,” he says, employing a more colorful word.

“Ultimately, streaming is the way of the future,” Carney tells Barron’s. “We’re never going to go back. Every artist would agree with that.”

Still, some songwriters are also upset that Spotify is appealing a ruling that would increase their royalties.

Spotify, whose executives declined to comment for this article, entered the U.S. market in 2011 after signing rights deals with the labels. That gave it a head start on Apple’s streaming service, which launched in 2015. Today, the two services are thought to have similar market shares in the U.S.

The international market is a different story. Tencent Music Entertainment Group (TME) dominates China. (Spotify has taken a minority stake in the company.) Outside of China, Spotify is the clear global market leader, with an estimated 31% market share, ahead of Apple (AAPL), at 17%; Amazon.com (AMZN), at 12%; and Sirius XM Holdings (SIRI), which now owns Pandora, at 11%, according to Credit Suisse . YouTube’s paid music services are still relatively small, but one survey found that free YouTube videos accounted for nearly half of the time that people in 18 countries spent listening to music.

Unlike other industries such as online travel, where competition was eventually whittled down to two dominant players, music streaming is likely to remain a battlefield. “I’ve had conversations with every label, and they understand very clearly that it is in their best interest to maintain as much competition of the distributors of their content as possible,” says Brian Russo of Credit Suisse, who rates Spotify at Underperform with a $120 price target.

Competition among the current streaming players is fierce. Spotify filed a complaint last month with European antitrust regulators claiming that Apple is unfairly charging Spotify to use its App Store. Apple countered that Spotify wants to get free access to services that other companies pay for.

Most of the world doesn’t pay for streaming music, choosing to listen on the radio or to pirate content, which still accounts for 38% of the market, Credit Suisse says. The bullish case for Spotify implies that many of those people can be persuaded to pay up. Even bearish analysts expect the company to more than double its global paid subscriptions over the next five years.

Yet there are sharp disagreements on Wall Street over where Spotify will be able to add subscribers and how profitable those subscribers will be. (The ads that run on Spotify’s free service account for less than 20% of revenue.) As the company has expanded, its average revenue per user has fallen, because it’s growing faster in less lucrative markets and more people are choosing student and family plans.

In February, Spotify projected a slowdown in the growth of monthly active users and paid subscribers for the coming year.

Before Spotify went public, the labels signed deals that allowed the company to increase its gross margin from 13.4% to 25.5% from 2016 to 2018. Their equity stakes—and interest in seeing Spotify succeed to compete with Apple—gave them substantial incentives to do so.

But there’s little evidence that the central players will give the next inch quite so easily.

Sony, which had initially taken the largest stake in Spotify, sold half of it last year, and Warner sold everything. Universal, the largest of the three and the home of 2018’s best-selling artist Drake, hasn’t announced any Spotify stock sales, but it is now going through its own transition. Vivendi plans to sell as much as half of Universal, and the company has been pitching itself to investors as a more valuable part of the music industry than Spotify.

Last year, Sony also bought EMI Music Publishing, which could further bolster its leverage. Spotify is girding for the next round of negotiations. “There was an economic self-interest of the record-label partners to allow the margin to increase, because, after all, streaming has been the single source of renewed revenue growth to labels,” Spotify Chief Financial Officer Barry McCarthy told investors in February. “So what was good for Spotify was good for the labels, and that’s why the margin increased. Now, on a go-forward basis, is that going to happen again? No, that’s not going to happen again.”

The labels are fighting Spotify in other ways, too, with Warner recently suing Spotify to try to limit its expansion in India.

How does Spotify fight back against these forces, and widen its slice of the pie? The company has clearly gained power as it has added subscribers. And Spotify could compete directly with the labels; it even has a small business helping independent artists stream their music directly. But Ek has repeatedly said he doesn’t want to replace the labels.

McCarthy, who was previously CFO at Netflix, outlined two paths to greater profitability. The first is to sell labels and artists new services like data about streaming habits.

The other strategy is to create new kinds of content. That’s where podcasts come in. Spotify announced this year that it will spend $400 million to $500 million on podcast-related acquisitions. It announced the first two deals in February, buying podcast producer Gimlet Media and podcast software company Anchor for $340 million. Ek has said that he sees nonmusic content eventually accounting for over 20% of Spotify listening, and that it is valuable largely as a draw for subscribers. Already, Spotify has shows that you can get only on its platform.

Industry insiders said the price tag—particularly for the Gimlet portion—was remarkably high, perhaps as much as 10 times revenue. And while the appeal of podcasting is growing, its financial impact is modest.

Podcasting may not scale as well as other digital media. A growing share of ads are read by the hosts, and they pay off for advertisers because they blend more easily into the content. Targeted programmatic ads—the kind that have made billions of dollars for Alphabet ’s Google (GOOGL) and Facebook (FB)—haven’t taken off on podcasts. The industry’s trajectory looks more linear than exponential.

There’s a third way for Spotify to become a chart-topping investment, but it’s a wild card that won’t play out for a while, if at all. The music industry is rarely static, and the pending sale of a stake in Universal Music is one sign that the players could change.

If the labels break apart, or a more tech-focused company buys into the content, Spotify is well placed to take advantage. Anyone with a garage full of 8-tracks knows change happens fast in the music industry.

Anderson of Baillie Gifford believes that Spotify’s CEO has the necessary skills. “Ek will probably be the most important European business leader of the next 30 years,” he says.

Steve Mollenkopf emerges as clear winner in epic legal battle against Tim Cook

There cannot be many chief executives who have faced as many crises as Steve Mollenkopf in his five years as chief executive of US mobile communications technology company Qualcomm.

There was the campaign from an activist investor (Jana Partners) to break up the company, and the antitrust challenge that threatened to dry up revenue from Qualcomm’s largest market (China).

Then there was the $121bn hostile takeover bid from Broadcom that might have succeeded if the White House had not intervened — not to mention the $44bn acquisition (of NXP) that was scrapped when China failed to approve it.

It is almost an understatement when Tom Horton, who has just stepped down from Qualcomm’s board after 10 years as the company’s lead independent director, calls it “a pretty tumultuous time”.

But none of that compares with what is set to be one of Mr Mollenkopf’s career-defining moments: facing down his counterpart at Apple, Tim Cook, in an epic global legal battle fought in courts on three continents. The dispute ended in face-to-face negotiations between the two that left Mr Mollenkopf the clear winner this week.

Apple has spent the last two years condemning Qualcomm’s fundamental business model. While the company sells mobile communications chips, it relies for most of its profits on charging a royalty on every handset that is sold, regardless of whether it has one of Qualcomm’s chips in it. Now, the iPhone maker has fallen back into line. Qualcomm’s shares jumped nearly 40 per cent, adding $28bn to its stock market value.

By any standards it was a stunning victory, and a mark of a steely determination. It is easy to underestimate the Qualcomm chief. With a quiet, affable exterior, he is not given to the sort of messianic bursts that some other tech industry bosses favour.

People who have worked with him all point to the same qualities: a calm, highly analytical style, and the self-confidence to stick to a position when he believes he is right. “He is an engineer in the best sense of the word: He is disciplined, analytical, smart,” said Mr Horton.

At Qualcomm, he heads a company that has built a unique position in the mobile communications world through a combination of engineering vision and legal resolve. The creation 34 years ago of Irwin Jacobs, an inventor in San Diego who promoted a radical idea for packing more communications traffic into less bandwidth, Qualcomm’s technology has played a key role in the mobile industry since 3G, the industry’s first high-speed data standard.

“It’s always been a place that values the science, that values the IP, that values the engineering,” said Scott Barshay, a mergers and acquisitions lawyer who has worked on Mr Mollenkopf’s biggest deals.

Mr Mollenkopf arrived at Qualcomm 25 years ago, fresh from getting a masters degree in electrical engineering from the University of Michigan. His company biography credits him with being listed as an inventor on 38 patents. He rose to head the company’s chip division in 2008, putting him in line to succeed Mr Jacobs’ son, Paul, to become the first non-family member to run the company.

On his rise to the top, Mr Mollenkopf was a driving force behind some of the company’s key technology decisions of recent years. He is credited with steering Qualcomm towards LTE, a wireless standard that did not have its roots inside the company, after it had earlier backed a rival technology.

And he pushed the company to add computing capabilities alongside the core communications functions on its chips, said Mr Barshay — something that set Qualcomm up to be the leading supplier of the chipsets now used in high-end smartphones.

The Qualcomm engineers would not have prospered without the lawyers, though. Its insistence on getting a royalty from all mobile handset makers has brought a series of legal attacks and regulatory challenges, including a bitter fight with Nokia that ended more than a decade ago

The Apple assault, launched in early 2017, rattled Qualcomm’s shareholders and became the ultimate test of Mr Mollenkopf’s ability to stay the course. “He analysed it correctly, he had the courage of his convictions, and he stuck to it,” said Mr Barshay.

Neutralising the Apple threat will not end Mr Mollenkopf’s legal and regulatory headaches. The company is appealing against a €1bn antitrust fine last year from the European Union. In the US, a judge is considering an argument from the Federal Trade Commission that would hit at the company’s ability to charge royalties.

And even if he succeeds in defending Qualcomm’s way of doing business, he still faces an overriding business question: whether he can use the coming wave of 5G technology to take Qualcomm beyond the maturing handset business into new markets. At the age of 50, and after the battle scars of his first half-decade, it may be just the start.

Sovereign wealth fund investment includes landmarks on Times Square and Fifth Avenue

Qatar’s sovereign wealth fund has teamed up with US real estate group Crown Acquisitions to acquire a stake in some of New York’s most iconic properties in Times Square and along Fifth Avenue, including the St Regis hotel and luxury jeweller Harry Winston.

Crown and Qatar Investment Authority will each acquire a 24 per cent stake in a portfolio of properties controlled by Vornado Realty Trust which they estimate to be worth $5.6bn. The portfolio includes 910,000 square feet of space, including retail up and down Fifth Avenue and counts Victoria’s Secret, Polo and Salvatore Ferragamo as tenants.

The deal is likely to attract scrutiny given the close ties between the Qatari royal family and US president Donald Trump’s son-in-law Jared Kushner, whose own family real estate empire ran into difficulty in recent years and was indirectly helped by QIA.

The Kushner Companies had reached a deal in 2018 to lease 666 Fifth Avenue to Brookfield Asset Management, a property group in which the Qatari government has placed investments, a move that helped the family of Mr Trump’s son-in-law exit a lossmaking real estate bet. That deal came months after Vornado agreed to sell its stake in the top of the tower back to Kushner, while retaining the retail portion of the building at the bottom.

As part of the new deal, Crown and QIA will both take a stake in the retail property at the bottom of 666 Fifth Avenue, which counts both Hollister and Uniqlo as tenants. Vornado said it would use $390m of the $1.3bn in cash paid by Crown and the Qataris to pay off a loan on 666 Fifth Avenue, according to a filing with US securities regulators.

The properties on Fifth Avenue included in the deal are blocks from Trump Tower, stretching from 51st Street up to 55th Street. An increased security presence after the 2016 presidential election initially weighed on sales for a number of retailers in the area, with Tiffany & Co warning sales at its flagship Fifth Avenue location had tumbled.

The deal also comes at a time when the New York real estate market has softened and landlords have come under pressure from a spate of new openings, including the multibillion-dollar Hudson Yards development on the far-west side of Manhattan.

“It’s been a market that has gone from being one of the hottest with significant growth to one that has had large reductions in value and elevated levels of vacancy,” said James Sullivan, an analyst at BTIG.

Times Square’s popularity with tourists has shielded it from the broader downturn, added Mr Sullivan. “It’s a market that is to be distinguished from some of the other markets in Manhattan,” he said.

But Fifth Avenue is now being tested by a slew of new additions that are splintering its hold as the premiere luxury shopping destination, particularly with several venerable retailers — including Ralph Lauren — closing their doors.

Upper Fifth Avenue, between 49th and 59th streets, saw asking rents for ground floor retail decline 24 per cent year over year to autumn 2018, according to a report from the Real Estate Board of New York, while the stretch of retail space between 42nd and 49th dipped 14 per cent.

The fight for luxury retailers has now reached the southern tip of Manhattan, where real estate behemoth Brookfield has opened a luxury mall, up the West Side Highway to Hudson Yards, to the bottom of Central Park, where Nordstrom is in the midst of building the second of two department stores in the area.

Vornado has been selling many of its Manhattan properties in recent months as rents for retail space have fallen. The drop in lease prices has been spurred by collapsing store sales as consumers — even those considering a $4,000 Gucci handbag or $890 Prada pumps — increasingly buy goods online.

For the Qatari fund, the deal represents its latest move to deepen its presence in the US, where it plans to invest as much as $45bn in the coming years.

“This investment underlines QIA’s ambition to substantially increase our US investments over the coming years, and our belief in the exciting long-term possibilities offered by New York City,” said Mansoor Al-Mahmoud, chief executive of QIA.

New system would replace tennis tournament’s traditional postal process

The Wimbledon tennis championships plans to move into the digital age by developing an online ballot for those wanting entry to the annual tournament, after many years of insisting fans apply for tickets by post.

The move would settle a debate that has raged within the wood-panelled corridors of the All England Lawn Tennis and Croquet Club, the 151-year-old body that runs the annual competition, over whether to change its restrictive ticketing policies.

Close to half a million people attend Wimbledon each year, with the vast majority of tickets sold through a public ballot many months in advance of the summer tournament that is one of the sport’s four “grand slam” events. Applicants are required to fill out paper forms, send them through the mail along with a stamped-addressed envelope.

The All England Club has been reluctant to tamper with traditions that give the Championships its exclusive glamour, such as insisting players wear predominantly white clothing on court. But among Wimbledon officials, there is a growing acceptance to modernise the ticketing process.

During the past few months, the All England Club has been building a new internet ballot, according to people with knowledge of the plans.

These people added that while the online system remained in development, an official announcement could be made as early as this month with a view to introducing the internet ballot in time for next year’s Championships.

“The benefits outweigh the disadvantages,” said a person close to Wimbledon’s leadership.

The All England Club declined to comment.

Wimbledon is one of the hottest tickets of the British sporting calendar partly because of how difficult it is to gain entry to its perfectly manicured grass courts.

About 17 per cent of tickets are debentures, with wealthy patrons paying as much as £80,000 for a guaranteed seat to the tournament for five years. Another 10 per cent go to corporate hospitality.

A further 1,500 tickets are made available each day of the two-week tournament for Wimbledon’s “show courts”, where the best matches take place, including 500 on centre court. For these, fans must join a queue — which usually involves camping at the grounds for at least a night. A small number of tickets are sold to international customers online.

Otherwise, the majority of seats in the UK are allocated by the postal ballot, which has been oversubscribed for years. About 1.5m people attempt to acquire tickets for Wimbledon every year, mostly through the ballot.

A person close to the All England Club’s leadership said the postal system had the advantage of drawing “fairly determined” spectators, as there have been fears an online system would be flooded by applicants making it even harder to obtain a ticket.

There have also been concerns that older fans who may not be comfortable applying online.

Another stumbling block is that any internet system could be exploited by touts.

At other major events, professional scalpers use “bots”, automated software that can harvest tickets in bulk, so they can be resold online at inflated prices on secondary reselling sites such as StubHub, Viagogo and the Ticketmaster-owned sites GetMeIn and Seatwave.

The global secondary ticketing market is worth $8bn a year, according to Ticketmaster.

Wimbledon has previously sought methods to beat the online touts. One model is a successful experiment in 2016, where it partnered with Ticketmaster for one day’s play to adopt a “paperless” system. Customers could only enter the ground by swiping the credit card that they made payment with online. All 22,000 tickets were sold within 27 minutes of going on sale.

Ultimately, the All England Club appears ready to move towards a digital ticketing system because this would allow it to gather more data about the people coming through its gates.

“A paper based [ballot] doesn’t gather customer information,” said a person with knowledge of the plans. “[The aim] is to create a more meaningful relationship.”