Spotify losses are not music to investors’ ears as it goes public

March 4, 2018 10:00 am


Streaming music has survived the test of times and millions of music fans ask for the service, only most everyone in the business today, including Spotify, is losing money.

Spotify is losing billions and still going ahead with an initial public offer (IPO).

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The mystifying IPO

According to industry platform Gizmodo, Stockholm-based streaming giant Spotify finally made it official and filed documents for an IPO on the New York Stock Exchange last Wednesday, pursuing the unusual option of a direct listing instead of a traditional IPO.

“Per the New York Times, that process is one in which no new stock is issued, and therefore no money is raised,” and that will allow investors and insiders to freely trade shares on the market,” said Gizmodo.

“It means Spotify shares could immediately experience volatility as the company sprints out the door.”

The Financial Times (FT) said Spotify will begin trading without a public share sale ahead of its listing and has been valued at $19.7bn, based on the midpoint of a range of share sales in February.

“This puts it close to the valuation of Snap, the owner of the photo-sharing app Snapchat, at its IPO a year ago,” said FT.

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CNBC said that among the many things that distinguish Spotify’s upcoming share sale from a typical IPO, is that existing investors can cash out whenever they want.

It will also lack a traditional 180-day lock-up period, when major investors are typically forbidden from selling their shares to avoid flooding the market.

“Spotify CEO Daniel Ek , who owns 25.7%, and co-founder Martin Lorentzon, who owns 13.2%, aren’t subject to that agreement, nor are  Tiger Global 6.9%, Sony 5.7%, or Technology Crossover Ventures 5.4%,” said CNBC.

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Music industry mad at Spotify

Gizmodo said that Spotify has drawn the ire of songwriters and publishers who claim streaming services are not fair with distribution of royalties.

And now there is an accounting problem threatening to blow the issue out of proportion.

Industry analyst MarketWatch noted Spotify’s filing documents indicating that “it may have screwed up internal financial procedures that could result in lawsuits if it turns out the company underpaid copyright holders.”

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On the loss column

The Wall Street Journal  said that while Spotify claims to be worth up to $23 billion, its losses are also skyrocketing

“It posted $5bn of revenue in 2017, up nearly 39% from the prior year. The company, which has yet to turn a profit, posted a loss of $1.53bn in 2017, wider than losses of $663 million in the prior year and $283 million in 2015,” WSJ said.

Competition playing dirty

Spotify now claims to have 159 million monthly active users with 71 million paid subscribers.

But Bloomberg recently noted that rivals with very deep pockets like YouTube, Apple, and Amazon are all trying to scale up their operations and have shown a willingness to play dirty when it comes to competitors’ access to their hardware products.

“They’re willing to burn cash on music just to create synergy with that hardware, whereas Spotify doesn’t have the luxury of being funded by a larger product line,” Bloomberg said.

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Statista said music streaming is proving itself to be a very hard sector to turn a profit in.

“Apple and Amazon have one huge advantage over their competitors which is they don’t actually need to make money from streaming,” said Statista.

“Apple will likely be happy to take a loss with its streaming service, as long as it gets people to buy more of the company’s devices. Similarly, Amazon will be more than content if their service attracts more prime customers.”

Courtesy of Statista (www.statista.com)

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 Subscribers growing, revenues declining

According to Business Insider (BI), Spotify, after paying royalties to music labels, it’s left with only 20 cents of every dollar it takes in.

“But even as the company has been signing up more and more subscribers, each one of those subscribers has become worth less and less revenue to the company,” BI said.

Spotify says it collects $10 per month from each of its subscribers who pay the standard subscription rate, but BI says it’s much less.

“Spotify spelled out the situation in its regulatory document. Last year, the company got about $6.53 in revenue per subscriber per month. That was down 14% from the previous year, when it took in about $7.61 monthly from each subscriber. The average revenue was down 22% from 2015, when the company saw about $8.39 a month per subscriber,” said BI.

Courtesy of Statista (www.statista.com)

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Average revenue per subscriber is how much Spotify collects from each subscriber before it deducts various expenses such as advertising and music royalty fees.

According to Reuters, Spotify’s subscription revenues were only $3.7 billion in 2017, not the $5bn plus claimed.

“Meanwhile, Spotify’s overall revenue growth rate has decelerated from 79% in 2015 to 39% last year,” said Reuters.

One thing the company will do transparently is that it will publicly live-stream its pitch to investors in lieu of a traditional roadshow, according to FT, in an effort to “democratise information” in a departure from the closed-door process of traditional IPOs.

 

 

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Hadi Khatib
By Hadi Khatib
Hadi Khatib is a business editor with more than 15 years' experience delivering news and copy of relevance to a wide range of audiences. If newsworthy and actionable, you will find this editor interested in hearing about your sector developments and writing about it.



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