Spotify, the world’s largest music streaming service, went public this morning, trading under ticker name SPOT, with the New York Stock Market setting its reference price at $132 a share. That puts the company value at $23.5 billion. That’s on target with what CNBC reported last month when it said Spotify shares were traded on private markets were for as high as $132.50 a share. Spotify’s last valuation was at $8.4 billion when it raised a financing round of $400 million back in 2015.
Sweden-based Spotify is available in 61 countries with an overall user base that includes ad-supported free listeners of 159 million, and 70 million paying users as of January 2018. The company was founded in 2006 by Martin Lorentzon and Daniel Ek, who remains its current CEO.
For its public offering, Spotify has taken an unconventional and somewhat risky approach called direct listing, a route normally taken by small-cap companies, usually in biotech and life sciences. It’s a less expensive alternative to an IPO where the business sells shares directly to the public without any intermediaries, but it also means drawbacks like no deal support from the bankers.
Ek explained his position in a company blog post published yesterday. “Spotify is not raising capital, and our shareholders and employees have been free to buy and sell our stock for years,” he wrote. “So while tomorrow puts us on a bigger stage, it doesn’t change who we are, what we are about, or how we operate.” Spotify is the biggest company to ever go public via direct listing, and the first on the NYSE.
Spotify’s IPO paperwork showed that it is going through a tremendous amount of cash — posting revenue last year of €4,090 million (nearly $5 billion) and a net loss of around €1,235 million (or about $1.5 billion) for the same period — but its gross margin is growing, thanks to newly negotiated licenses with the major labels. These deals not only reduce Spotify’s royalty payouts, but will allow the company to predict their music costs for several years.
However, there are obstacles for Spotify to dodge as it continues to grow. Recently, it had to crack down on users running modded versions of the app to stream music for free while blocking ads. Spotify’s IPO filing notes that about 2 million users are getting around ads on Spotify without paying, or about 2.3 percent of all free Spotify accounts. It also has some odd lawsuits still lingering around, like the one filed by Wixen Publishing over mechanical licenses to the tune of $1.6 billion.
Despite this, it’s impossible to deny Spotify’s success over the years as one of the earliest and most promising music streaming businesses. Its closest competitor, Apple Music, only has 36 million paid subscribers, although that number might surpass Spotify’s by this summer. But, even if that’s the case, Spotify is predicting it will be just fine in 2018 by continuing to focus on its central revenue stream of user subscriptions. The company is predicting as many as 96 million paid subscribers and a 30 percent increase in revenue to $6.6 billion by year’s end.
Bumping up subscriptions alone likely won’t fix the catch-22 of Spotify’s business model, where the more money it makes, the more money it pays out to the labels. It needs to find additional revenue streams or continue to work on reducing label payouts. The latter is a tough ask. Trying to appease everyone when no one is satisfied is not an enviable position for Spotify, but it’s the one they’re currently in. Artists are already only making fractions of a cent per stream on the platform (less than Apple Music but considerably more than YouTube), and labels are still slow to change old habits and recognize the new, modern market of music consumption. This doesn’t leave Spotify without options; it could give the labels greater equity, for example.
Ultimately, how successful Spotify’s public offering is will depend on whether investors believe there is a light at the end of the tunnel when it comes to profitability and how sustainable its business model is, not just for its own bottom dollar, but for the artists that are its lifeblood.