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Spotify Preparing for IPO, Pandora Struggles

Posted on Monday, Dec 12th 2016

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Over the past decade, streaming has seen a dramatic rise as a dominant form of music listening. Tech giants like Amazon and Apple have launched their own paid streaming services. Against this backdrop, Spotify is preparing to go public and Pandora, which is feeling the heat.

Spotify’s Journey

Stockholm, Sweden-based Spotify was founded in 2006 by serial entrepreneur Daniel Ek and Martin Lorentzon. The two developed and released the Spotify Swedish music streaming app in 2008. Today,it has grown to become a music, podcast, and video streaming service with over 100 million users and 40 million paying customers.

The number of paying customers increased by 10 million in just 6 months driven by its decision to extend the Family Plan to six friends or family members. The Plan costs $15/£15/€15 a month. Spotify also offers its services for free wherein its revenue comes from the ads played in between tracks.

And now Spotify is reportedly preparing itself to go public in 2017. Martin recently stepped down as chairman and CEO Daniel will be taking his place.

Spotify’s Financials

Spotify reported record revenue of €1.9 billion ($2.2 billion) in 2015, up from €1.1 billion in 2014 and €0.75 billion in 2013. In the ten years of its operations, it has never been profitable. Net loss was at €173 million ($194 million) in 2015, up just 6.7% from €162 million. Losses had almost tripled in 2014 from €56 million a year ago.

The primary reason for its losses is the expensive licensing deals where music labels get about 84% of its revenue. So despite the 80% surge in revenues, its royalty and distribution fees also soared 85% to €1.63billion ($1.8 billion) in 2015.

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Subscriptions account for about 90% of its revenues and grew 78% to €1.74 billion ($1.95 billion). Ads account for 10% and grew 98% to €195.8 million ($219 million). At the end of 2015, it had 89 million active users, up from 60 million in 2014 and over 28 million paid users.

Spotify has been venture funded so far with $1.56 billion in investments from Asset Management Partners, Baillie Gifford, D.E. Shaw & Co., Discovery Capital, Goldman Sachs, GSV Capital, Halcyon Asset Management, Lansdowne Partners, Northzone, Rinkelberg Capital, Senvest Capital, Technology Crossover Ventures, TeliaSonera, Alexandre Mars, AFSquare, Fidelity Ventures, Lakestar, The Coca-Cola Company, 137 Ventures, Accel Partners, DST Global, Kleiner Perkins Caufield & Byers, Founders Fund, Sean Parker, Horizons Ventures, and Li Ka-shing. In March 2016, Spotify raised $1 billion in convertible debt and was valued at more than $8 billion. An earlier round of funding in June 2015 for $526 million valued it at $8.5 billion. Their valuation has grown four times from the $2 billion valuation that they were at, back in 2012.

Pandora’s Financials

Meanwhile, Pandora (NYSE:P), which went public in 2011, struggles to turn profitable and is trying to move into concert promotion. This week, it has also announced its plans to launch Pandora Premium. It now has three main revenue streams: ticketing, Internet radio with the launch of a new version of its $5 a month Pandora One service called Plus, and $10 a month Pandora Premium subscription.

Third quarter revenue grew 13% to $351.9 million. Analysts estimated revenue of $313 million. GAAP net loss was $61.5 million compared to a net loss of $85.9 million. Non GAAP net loss was $16 million or $0.07 per share. Adjusted EBITDA was a loss of $6.6 million, compared to a profit of $31.5 million last year.

Advertising revenue grew just 7% to $273.7 million. Subscription and other revenue grew a mere 1% to $56.1 million. Ticketing service revenue was $22.1 million, up about 25% from levels before the October 2015 Ticketfly acquisition. Total listener hours grew 5% to 5.4 billion while active listeners declined slightly to 77.9 million from 78.1 million last year.

Total revenues per thousand listener hours (RPMs) increased $61.09. Ad RPMs were also up to $58.1. Total licensing costs per thousand listener hours (LPM) were $32.31, down from $41.06 last year.

For the fourth quarter, revenue is expected to be in the range of $362 million to $374 million and adjusted EBITDA loss is expected to be in the range of $51 million to $39 million.

For the full year, Pandora expects revenue in the range of $1.354 billion to $1.366 billion. Adjusted EBITDA loss is expected to be in the range of $140 million to $128 million. Revenue for 2015 was $1.16 billion, up 26% while consolidated adjusted EBITDA was $51.7 million.

Its stock is trading at $13.84 with a market capitalization of $3.23 billion. Its 52-week range is $7.1-$16.23. Its stock surged after rumors of a takeover by satellite radio company SiriusXM, a long-time suitor that had been turned down early this year. Last year, we were wondering if Apple might want to acquire Pandora to increase its user base in the US.

Clearly, profitability is quite an issue with the online music streaming industry. However, given the ramp in Spotify’s revenue and customer numbers and steadying losses, its IPO looks promising.

Photo Credit: Casey Marshall/Flickr.com

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