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2018 IPO Prospects: Spotify to Test Direct Listing

Posted on Monday, Jan 8th 2018

According to the Recording Industry Association of America (RIAA), the US streaming music accounted for a majority of the retail music industry revenues. For the first half of 2017, retail revenues grew 17% to $4 billion, of which streaming services accounted for $2.5 billion and grew 48% over the year. Revenue from listeners paying to listen to streaming platforms like Spotify and Apple Music grew 61% over the year to $1.7 billion. Of this, $0.3 billion came from ad-supported on-demand options and $0.5 billion from listeners paying for radio services. About 30 million people in the country listen to a streaming music site.

Spotify’s Financials

According to another report from MiDia, Spotify leads the market with nearly 35% share in 2016. Apple Music came in second with a 16% market share.

Sweden-based Spotify was founded in 2006 by serial entrepreneur Daniel Ek and Martin Lorentzon. Its music streaming app was released in 2008. Like other streaming services, Spotify allows listeners to listen to digital music, create, share, and edit playlists and discover music based on recommendations. Over the past few years, Spotify has tied up with device manufacturers to allow gaming and streaming boxes to stream music through them. Currently, Spotify has 70 million subscribers around the world.

Spotify earns revenues through an ad-based and a subscription-based model. Users have the choice to listen to an ad-supported channel or can pay a $9.99 a month subscription fee to listen to ad-free music. The subscription also allows the listeners to download music to listen to it offline.

The rapid adoption of the service has translated into high revenue growth. Revenues for fiscal 2016 grew 52% to $3.5 billion. According to more recent reports, revenues are expected to grow another 40% in 2017 to €4.1 billion (~$4.9 billion). For the first half of 2017, revenues had come in at €1.9 billion (~$2.2 billion). High revenues have not, however, translated into profits. Spotify continues to spend significantly on royalty and distribution costs. Losses for 2017 are expected to decline to €200 million (~$231 million) from €557 million (~$660 million) in 2016.

Spotify has been venture funded so far with $2.71 billion in venture funding 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. Its valuation is estimated to have grown to $20 billion since $8 billion in March 2016.

Spotify’s Listing

Recently Spotify announced that it had filed with the SEC to go public. Unlike traditional IPOs, Spotify is pursuing the direct listing method that would allow it to trade its shares publicly without underwriting pressures, lock-in periods, and listing prices. As part of this move, Spotify also recently cleaned out its balance sheet. It converted its TPG and Dragoneer Investment funded convertible $1 billion debt to equity at a $10 billion valuation. Last month, Spotify and Tencent entered into an equity swap agreement that valued Spotify at $20 billion.

Spotify’s Law Suits

But not all is rosy in Spotify’s world. Last month, Spotify was sued by Wixen Music Publishing Inc for damages worth at least $1.6 billion. Wixen is alleging that Spotify used thousands of songs without a license and compensation to the publisher. Wixen is known for administering music by performers like Tom Petty, Zach De La Rocha, and Tom Morello of Rage Against the Machine, David Cassidy, Neil Young, and Stevie Nicks, to name a few.

This is not the first time that Spotify has been sued. Last year, it had settled a class action suit with a payout of $43 million. It had also settled another lawsuit with the National Music Publisher’s Association for $30 million. Spotify is not too concerned about the lawsuit.

It will be interesting to see how the market truly values Spotify. Rival Pandora (NYSE: P) hasn’t had a jolly run on the stock exchange. The company had listed in 2011, and last year alone, it recorded a 62% decline in its valuation. Pandora’s stock is currently trading at $4.96 with a market capitalization of $1.2 billion. For comparison, Pandora had reported revenues of $378.6 million for the third quarter last year with a net loss of $66 million.

This segment is a part in the series : 2018 IPO Prospects

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