Spotify Going Public
Music streaming service Spotify filed for a direct listing of its shares on Wednesday, February 28. For the first time, the company will lay out its financial data. As a result, some analysts cheered the move. However, others questioned how the music service could turn a profit from its growing subscriber base.
Ideally, Spotify would trade as SPOT on the New York Stock Exchange. The company is taking an unusual path to the U.S. public markets. This is because it will offer a direct listing that will let investors and employees sell shares. Furthermore, Spotify will not raise new capital in the process nor hire a Wall Street bank or broker to underwrite the offering.
Because the company will not issue any new shares, it did not specify a listing price. However, based on private transactions, estimates conclude Spotify is worth around $19 billion.
Initially, Spotify was launched in 2008 and is currently available in more than 60 countries. As a matter of fact, Spotify is one of the largest music streaming companies in the world. Moreover, it considers services from Apple, Amazon, and Google as its main rivals.
Rising Sales, Costs in Check
In the filing, Spotify laid out detailed financial data for the first time. Analysts took the growing revenue and relatively steady operating costs as positives. For instance, revenue rose 39 percent from 2.95 billion euros in 2016 to 4.09 billion euros ($4.99 billion) in 2017. Meanwhile, operating-loss only increased from 349 million euros to 378 million euros during that period.
Nonetheless, Spotify saw a net loss balloon to 129 percent in 2017. This was driven mostly by financing costs related to a 2016 deal in which the company raised $1 billion in debt. This debt would convert to shares upon an initial public offering.
Comparatives To Competition
Comparatively speaking, Spotify has about twice the number of music streaming paid subscribers as their closest competitor Apple. Spotify has 71 million premium subscribers, whereas Apple has 36 million. However, after adding customers who listen to advertising-supported streams, Spotify has about 159 million monthly average users.
Meanwhile, Amazon Music Unlimited has 16 million paying subscribers, and Pandora Media has 5.48 million total subscribers. Google has not mentioned how many subscribers it has to its music streaming service Google Play.
Spotify’s premium subscription costs $9.99 a month. However, the company also offers an ad-supported service, which Apple does not provide.
Spotify states the following:
With our ad-supported service, we believe there is a large opportunity to grow users and gain market share from traditional terrestrial radio.
The net proportion of subscribers who left Spotify’s ad-supported service fell to 5.1 percent of paying customers at the end of 2017. Thus, a decrease from 6.9 percent at the start of 2016, Spotify mentioned.
Larry Miller, head of the music business program at New York University’s Steinhardt School, makes the following statement:
This has been a question we’ve been wondering for a long time: how sustainable is Spotify’s model? This is the very first time we’re seeing public disclosure about churn, and the news there is really good.
Spotify calculated that customers brought in 3.6 times more revenue than the company spent on marketing. In 2017, this helped to boost free cash flow to 109 million euros by the end of last year.
Still, Spotify is head to head against Apple, Amazon, and others. As such, the company is competing against companies that never need to make a dime on music as a standalone business. Instead, these companies use music streaming to drive other aspects of their business.
Apple and Alphabet also control the two main operating systems used by smartphones, iOS, and Android. They and Amazon are all developing computer assistants, such as Amazon’s Alexa and Apple’s Siri that could give such companies advantages.
While filing, Spotify states the following regarding its competition:
Many of our competitors enjoy competitive advantages such as greater name recognition, legacy operating histories, and larger marketing budgets, as well as greater financial, technical, human, and other resources.
Apple has launched massive marketing campaigns around its service. As a result, it added subscribers rapidly in the last three years. Without a doubt, competition has increased.
Spotify has a powerful ally in the music arm of China’s Tencent Holdings Ltd. Last December, the companies discussed swapping minority stakes in each other. This helped increase exposure in each other’s core markets.
Spotify Stock Volatile
A direct listing does not dilute ownership, as would happen with a conventional initial public offering. This saves hundreds of millions of dollars in underwriting fees. However, it also frees existing owners from any lockup period restricting them from selling their shares following the listing. Underwriters that provide price stability for new listings are not used in a direct listing. As a result, shares could have a volatile start once stocks go public.
Shares trade privately in a wide band. Spotify is valued between $16.8 billion and $22.5 billion. In private markets, recent share prices ranged between $95 and $127.50. It is estimated that 178 billion shares will be outstanding by the end of February.
Synovus Trust portfolio manager Dan Morgan described Spotify as “interesting.” However, he questioned how quickly it might become profitable. He makes the following challenge:
How can Spotify monetize its user base beyond a $5-$15 monthly subscription fee?
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