Spotify, highly valued in private trading, files for a $1 billion IPO

Spotify, highly valued in private trading, files for a $1 billion IPO

Spotify, the popular music, podcast and video streaming service, recently filed paperwork in February for an initial public offering of $1 billion. The company will be traded on the New York Stock Exchange under the ticker symbol “SPOT.”

In an uncommon decision, the company’s shares will be listed directly on the exchange, without underwriters to help assess demand and set a price, according to CNN. As a result, the trading volume and price of ordinary shares may be more volatile. Spotify will also not issue new shares to raise money, but rather, it will give investors the opportunity to own existing shares of a company that used to be privately held.

According to the company’s prospectus, investors trading Spotify’s shares in private transactions have valued it at as much as $23 billion. The company outlined its mission in its filing, stating that its purpose was “to unlock the potential of human creativity by giving a million creative artists the opportunity to live off their art and billions of fans the opportunity to enjoy and be inspired by these creators.”

Spotify currently boasts approximately 159 million monthly users, with 71 million users paying for the service’s premium subscription. Apple Music, its closest competitor in the streaming music business, has only 36 million subscribers and no free option. According to Forbes, the company generated $5.04 billion in revenue last year, up 40 percent from $3.57 billion in 2016 and 111 percent from $2.34 billion in 2015.

The service operates under a freemium business model. Basic services, such as listening to music, creating playlists and letting friends know what songs one is listening to, are free. Free users of Spotify have to listen to advertisements, however. Additional services, such as listening to music offline, enhanced sound quality and mobile listening without shuffle mode enabled are available to those who purchase a subscription to the service.

However, Spotify appears to be hampered by its business model. Every time a song is streamed, Spotify has to pay royalties to record labels and music publishers. These royalties go to the big three rights holders in the music industry — Universal Music Group, Sony Music and Warner Music Group — as well as Merlin Network, a consortium of independent labels, according to The Wall Street Journal.

As more users listen to music on Spotify and the company becomes more successful, it has to pay higher costs as a result. Compare this to Netflix’s business model, in which the video streaming company pays a flat fee to stream content for a set period of time. Although Spotify’s revenue increased from $3.6 billion in 2016 to $5 billion in 2017, its operating losses also increased from $426 million to $462 million in the same time period.

Additionally, Spotify has few options to decrease its future losses from royalties. If the company becomes large enough, it could possibly negotiate a better deal with music rights holders. However, this does not solve the problem of necessary content belonging to a few owners. The big three holders do not have to negotiate with Spotify. They could even increase the price of royalties and Spotify would not be able to object or use an alternative. The big three and Merlin Network accounted for 87 percent of all songs streamed on Spotify last year. Netflix had a similar problem, where much of the content that users wanted to view were properties owned by other companies. To offer this content to its users, Netflix had to pay escalating content costs. To remedy this, the company decided to create its own exclusive content, such as the television show House of Cards. This effort proved so successful that Netflix is now investing billions into its own content production. In response to this, traditional media companies such as The Walt Disney Company and Comcast Corp. are trying to acquire more content to increase their bargaining power, as well as create media streaming services of their own. But Spotify might not be able to do the same as Netflix, since a new album created by a company does not have the same market pull as a new TV show.

Spotify has sustained criticism for its compensation model for artists.  With physical sales or legal digital downloads, artists are paid a fixed price per song or album. In contrast, Spotify pays its royalties by market share, calculated as the number of streams for an artist’s songs as a proportion to the total number of songs streamed on Spotify. The company then pays 70 percent of its revenue to music rights holders, who pay artists based on their individual contracts. The problem with this model is that popular music and artists are rewarded, but obscure artists lose out.

As streaming music becomes the dominant means by which users consume music today, lesser-known artists will be paid less by Spotify compared to how much they would be paid from CD sales or digital downloads. The service’s free tier is also a target of contempt, allowing users to listen to an artist’s music without the artist receiving any compensation.

Some artists, most notably Taylor Swift and Radiohead, have pulled their entire music collections from Spotify before having them eventually restored. Spotify claims that it is benefitting the entire music industry by steering users away from piracy and less monetized services over to its free service tier, where it then attempts to persuade users to pay for its premium service.

March 12, 2018

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