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Spotify files for public stock market listing

By | Published on Thursday 1 March 2018


Spotify has finally filed its documents to become a public company. The streaming service submitted the required papers to list on the New York Stock Exchange yesterday. As expected, it will arrive on Wall Street via a direct listing rather than a traditional IPO.

Of course, going public means giving up lots of information about the running of your company. And Spotify’s papers are full of it, giving potential investors a deeper look at what they could be getting themselves in for. And the rest of us things to chatter about.

The listing will give the company a valuation of $19.7 billion based on the midpoint of privately traded shares – although it adds that shares have traded at up to $132.50 each, which gives it a top end valuation of $23 billion.

In terms of users, Spotify says it currently has 71 million paying subscribers, with 159 million monthly active users in total across 61 territories, when its free subscribers are included in the mix. This, it notes, is far in excess of its closest rival, Apple Music, which has 36 million subscribers in total (that service not offering a free tier).

Despite this, the company acknowledges the threat it faces from Apple Music, as well as any music ventures led by Google, because both tech giants have the advantage of owning major app stores. Both charge third party developers transaction fees, which are not levied on their own services. This, in particular, makes Apple Music appear cheaper than Spotify, if bought through Apple’s app store (although their price points are actually the same when bought direct), as Spotify passes the 30% cut taken by the tech giant on to consumers.

Spotify’s filing also notes the possibility of other as-yet-unlaunched services taking market share from existing players, noting: “As the market for on-demand music on the internet and mobile and connected devices increases, new competitors, business models, and solutions are likely to emerge”.

With the majority of its users not paying for a subscription, instead relying on the ad-funded free service, Spotify also talked up that aspect of its business model. Although still bringing in a significantly smaller portion of its revenue than premium subscriptions, the company says ad income grew 41% last year, from $359.9 million in 2016 to $507.5 million.

Total revenues were $5 billion last year, just over double those of 2015. But still, the company is yet to make a profit. The music industry is doing very well out of it all, though. Since 2008, the listing discloses, Spotify has paid out over $10 billion to rights holders. The cost of royalties grew 27% last year, despite new deals with labels securing lower cuts.

The filing shows that in 2015, Spotify was paying about 88% of revenues to rights holders. Last year, this shrank to 79%. This is still higher than the 70% its business model demands – the result of the advances and minimum guarantees it provides the music rights owners – but it possibly indicates a trend in the right direction.

Even if it does reach profitability year-on-year, Spotify admits that it has built up a deficit of $3 billion, due to “significant operating losses” over the last three years. These have risen of late, reaching $461.2 million last year. Total losses last year were $1.5 billion – $1 billion of which related to its equity swap with Chinese company Tencent.

“We cannot assure you that we will generate sufficient revenue from the sale of our premium service and advertising for our ad-supported service to offset the cost of our content and these royalty expenses”, says the filing. “If we cannot successfully earn revenue at a rate that exceeds the operational costs, including royalty expenses, associated with our service, we will not be able to achieve or sustain profitability or generate positive cash flow on a sustained basis”.

Despite Spotify talking up its advertising business, the streaming services really need to reach a certain number of paying users to become viable concerns. Spotify has attempted to attract different types of users in recent years through various discounted rates for its premium package. Students can join for half price, while the family plan reduces costs for users who use several subscriptions on one account.

Although a wider variety of options is probably needed to ensure greater mainstream growth, current offerings do seem to be working. The number of premium users cancelling their subscriptions each quarter is falling. In the last quarter of 2017, this rate fell to 5.1%, down from 6% during the same period in 2016, and 7.5% in 2015. Paid subscriptions, meanwhile, are growing at 46% per year, and free accounts 29%.

As well as simply seeing how well Spotify shares fare on the public market, there will be a great deal of scrutiny of the success of the direct listing too. Spotify itself notes that this is a risky move, saying: “As this listing is taking place via a novel process that is not an underwritten initial public offering, there will be no book building process and no price at which underwriters initially sold shares to the public to help inform efficient price discovery with respect to the opening trades on the NYSE”.

As a result, it says, the company has hired Morgan Stanley “as a financial advisor to be available to consult with the designated market maker in setting the opening public price of our ordinary shares on the NYSE”.

Trading is set to begin “as soon as practicable after this registration statement is declared effective”.

This week’s CMU Trends article will delve further into Spotify’s public listing and what it tells us about the streaming business. CMU Premium subscribers will get instant access to this report – sign up to become one for £5 a month here.

With Spotify listing on the New York Stock Exchange, now is also the perfect time to read up on exactly how the streaming business model works. You can do just that by reading ‘Dissecting The Digital Dollar’, produced by CMU Insights for the Music Managers Forum. Buy the book on Amazon here.