Spotify will go public in the next few days, in an unconventional fashion where it is not issuing new shares, just allowing people to sell their existing shares publicly in what is called a direct listing – almost unheard of these days. It will put a value on the company certainly above $16 billion, but possibly as high as $25 billion. It has $1.5 billion in the bank and is only going public to satisfy debtholders, who have converted their debt into equity and will likely cash in all or part of their holding during the IPO. As a result the company has no debt, and its two founders, Daniel Ek and Martin Lorentzon, are both likely to get considerably richer through the IPO.
The company completed 2017 with revenues of €4,090 million ($5 billion) and grew revenues by 38% last year and premium subscribers grew by 46% over last year to reach 71 million subscribers, while advertising revenues on its free service grew 41% and listeners by 28%, despite this being the year when Apple signed most customers to Apple Music.
But the unconventional method of going public without setting a strike price for the offering and having it marketed and underwritten by major New York Banks, has created a wave of criticism due to it not sharing its favors with the banking community and this has resulted in negative positions for many media analysts, who are trying to steer people away from the offering as if in some way this will damage the business. It won’t. There is, for instance, much speculation that Spotify interferes with its playlists to lead it to paying lower royalties to artists and analysts are frustrated that it will not heed advice about going into the field of original content, as Netflix has done, by signing and supporting bands – as if it isn’t losing enough money right now – although in time that may become an option.
Listeners pay for two things really – access to 35 million tracks and the machine learning smarts that creates all the suggestions and playlists which make them easy to interact with, oh and of course, search.
Spotify made it clear in its accounts that it lost $378 million last year, even more than the prior year, but that is perhaps the price of growing at breakneck speed.
It also told the story of what is happening to recorded music industry revenues, which declined by 40% from $23.8 billion in 1999 to $14.3 billion in 2014. Spotify claims that since its business model took hold, that trend reversed itself in 2015 when global music revenues rose 3% for the first time in over a decade and in 2016, revenues reached $15.7 billion, up 6%, claiming the credit entirely for streaming premium subscription services, which brought in $4.6 billion in total during 2016, as physical sales and downloads (iTunes) continue falling at 8% and 21% respectively.
Spotify expects premium subscribers in Q1 2018 of between 73 and 76 million, up 41-46% year on year and revenues up to €1.15 billion, a rise of as much as 27%, but warned of a negative foreign exchange impact of up to €105 million which would lead to loss of €50-€80 million. For the full year it expects premium subs to go up to between 92 million and 96 million and for revenues to climb to between €4.9 billion to 5.3 billion, with foreign exchange impacts of €260 to €300 million for the full year and a continued loss of €230 to €330 million.