POV: Spotify files for IPO
On Wednesday 28th February 2018, Spotify, the world’s largest music streaming service, announced its plans for an Initial Public Offering (IPO).
Details and Implications:
The Swedish company launched in 2008 and is now active in 61 countries, with 159 million monthly active users and 71 million paid Premium users – almost double that of it its closest competitor Apple Music. Spotify’s paid subscriber base grew 46% year on year in the last 12 months and active users are up 29%. But, Apple is growing at a higher rate in the US, fueled in part by its devices in the hands of consumers, and is becoming a serious challenger to Spotify.
An IPO date hasn’t been set yet, but the filing is unusual as Spotify will list shares directly on the New York Stock Exchange (NYSE), bypassing the traditional stock offering process. This means that its shares can be traded on the open market sooner than with a more conventional IPO and without relying on underwriters to assess demand and set an initial price. Spotify will trade on NYSE under the symbol ‘SPOT’.
The IPO isn’t intended to raise a large amount of capital but instead will be used to allow an exit for early investors looking to cash in on the company's growth. Spotify said it expects shares to sell at prices that could value the business at more than $23bn. Its last valuation was $8.4bn, a valuation based on raising $400m back in 2015.
The filing disclosed that despite Spotify’s growing subscriber base and reporting €4.1bn (nearly $5bn) in revenue for 2017, up from €2.95bn a year earlier, losses are mounting. It reported a net loss of €1.24bn ($1.5bn) in 2017, more than double its 2016 loss of €539m ($657m).
The company said its “significant operating losses” were mainly due to content costs and royalty expenses. Spotify has paid more than €8bn ($9.7bn) in royalties to artists, music labels and publishers since its launch.
Royalty payments to artists and record labels are the biggest costs for any streaming service and will only continue to increase as its users continue to grow or listen more, demonstrating how difficult it is to make a profit in music streaming and that Spotify’s advertising and subscriber revenues currently struggle to cover the licensing demands of music labels. But, Spotify’s overall ad revenue in 2017 increased 41% to $147m and the company remains focused on growing its ad-supported channel and see this as “a strong and viable stand-alone product with considerable long-term opportunity for growth”. Much of that ad-supported revenue growth will be driven by programmatic revenues which were up 100% year on year and accounted for 49% of impressions Spotify sold in 2017 and made up 18% of its ad-supported revenue.
The filing also hinted at plans to expand beyond music into other forms of radio, stating:
‘with our ad-supported service, we believe there is a large opportunity to grow users and gain market share from traditional terrestrial radio.’
Spotify’s increasing revenue and subscriber numbers are a strong story for investors. However, its business model faces challenges from costs and competition from Apple, Amazon and Google – all of whom continue to invest in devices where their music streams are preloaded. This means that Spotify will need to find other ways to stay at the top and keep its shareholders happy.
If the IPO goes as planned, then it will be yet another huge IPO for a tech based business. The question is will Spotify follow in the footsteps of Google and Facebook and see stratospheric growth in its stock price or model more closely to Snap, which had an almost $30bn market capitalisation after its first day of trading last year, but it has struggled to sustain it.