An Interesting Spotify IPO Amidst Positives & Challenges

| December 3, 2018
Interesting Spotify IPO

A big IPO is making headlines. The news is about the IPO of Stockholm based giant Spotify. You may already know that Spotify is a global leader in music streaming industry.


How BIG is Spotify?

Spotify services are available in an incredible 61 countries. There are over 71 million paid subscribers as of December 2017. And there are 159 million free users. The company monetizes free userbase by serving ads.

The Closest Competitor

Apple Music is the closest competitor. But the user base is 36 million which stands no competition to Spotify. In fact, Spotify leads the race in music streaming industry outpacing Google, Apple, Tidal, and others.

An Interesting IPO

Spotify has filed for an initial public offering (IPO). “SPOT” will be the symbol (ticker) on the New York Stock Exchange. The company had hired Morgan Stanley, Goldman Sachs, and Allen & Co to help in its IPO process.

The company has a valuation over $23 billion based on trading in private markets as high as $132.50 per share. (In 2015, Spotify raised around $400 million and the valuation was $8.4 billion.)

The interesting part of the IPO is that there will be no underwriters. So there will be no set price decided by investment banks. (The underwriters advise opening trades on the New York Stock Exchange.) The company relies on the orders on NYSE for the price discovery. A statement by the company goes like this:

“The opening public price of our ordinary shares on the NYSE will be determined by buy and sell orders collected by the NYSE from broker-dealers and the NYSE is where buy orders can be matched with sell orders at a single price.”

No Underwriter In Spotify IPO
No Underwriter In Spotify IPO

Positives: Rising Revenues & Trailing Losses

Revenue is growing steadily. The annual revenue of the company was $2.37 billion in 2015, $3.6 billion in 2016 and $4.99 billion in 2017.

Compared to the growth of revenue, the losses are flat. The Company posted operating loss of $425.9 million in 2016 and $461.3 million in 2017.

2017 Surprise:

The company posted a loss of $1.5 billion in 2017. In this figure, a $1 billion was lost in irreversible expense (“one-time”) due to Tencent transaction.

Growing Consumer Base:

The company has said that the paid subscribers are increasing at a rate of 46 percent year-over-year. Similarly, ad-supported active listeners are growing at 29 percent year-over-year.

Challenges: Setbacks & Limitations

1 Spotify is facing challenges due to the nature of the business model. The revenue is from two obvious sources – 1) monthly subscription from paying subscribers and 2) ads revenue from free listeners. But, most of the money is spent on licensing demand from songwriters, music publishers, and labels.

2 The company tried original video content but wasn’t able to generate substantial revenue.

3 Spotify doesn’t have own hardware server to stream from. But the competitors like Apple, Amazon, and Google have incredible server infrastructure.

4 The company has tied up with Universal, Sony, and Warner. This helps Spotify in negotiating licensing fees. But still, a lot has to be achieved on this front.

5 Geographically, the location has been a concern for the company. The issue is regarding hiring and bringing top talent to Stockholm. The company has been pleading with the Swedish government to loosen immigration laws. (Due to the prevailing issues, most work is done in New York office.)

Why is Spotify Going Public Despite Odds & Corporate Raiders?

Spotify has been eyed by many corporate raiders. The odds seem piled against the firm. But still, Spotify wants to go public. The main secret behind confidence is the acquisition of the Echo Nest for a reported $100 million.

Echo Nest is a data predicting company that predicts future listening habits. This is helping the company to convert the 35 million song search box into a personalized mix tape. Data analytics helps render tailored music tailored according to personal tastes. 200 petabytes of user behavior data have been provided by The Echo Nest. That’s much higher compared to the 60 petabytes Netflix had in 2016.

Spotify records 150 billion plays, shares, follows, skips and other signals per day and tunes the recommendations.

Rap Caviar is Spotify’s popular playlist that constitutes 31 percent of user listening-time. The Discover Weekly playlist is fully stocked with music algorithmically.

Loyal users have been the strength of Spotify. Users spend 25 hours per month for streaming content. Millions of serious listeners have helped Spotify to claim the best streaming service spot. CEO Daniel Ek wrote to potential investors,

“We believe Spotify is differentiated from other services because we provide Users with a more personalized experience, driven by powerful music search and discovery engines,…”

Conclusion: Mutual Dependence Between Spotify & Music Industry

Music lovers trust the app to tell what they like to hear. Due to MP3 piracy nightmare, musicians and music companies need Spotify more than ever. Spotify has established itself as essential to the music industry. Mutual dependence is a good enough only reason for Spotify to go public.

Let us hope the company gains investor trust and performs well in the markets.