Why Spotify’s IPO spells trouble for the company
When a company like Spotify opens itself to closer scrutiny with an initial public offering (IPO), it means they are trying to evaluate the company’s real worth and investor appetite.
In Spotify’s case, it’s both.
Were the results as they hoped?
They sunk and stunk
The pre-IPO announced share value was $168.
Post IPO (last Tuesday), the stocks dropped in value to $146, and the company’s market cap was announced at $26.6 billion.
That translates into 182 million shares total, but while 91% of Spotify’s shares were tradable on Tuesday, only 30 million or 18% of shares were traded.
These are low numbers.
Many didn’t trade, some waited till the last second, and generally speaking, private share owners were shy, apprehensive, and unconvinced.
Not all shares ‘floated’ were Spotify’s; many were owned by Sony (6%), Daniel Ek, CEO of Spotify (26%), and others (68%).
Should you buy into the ’opportunity’?
Analysts such as Seeking Alpha, a company that offers Stock Market Insights & financial analysis, reported that getting in early on new IPOs is not always a good idea.
And Spotify is not profitable and might never be. Recent history showed that despite higher revenues, the company posted higher losses, registering $1.5 billion in the red in 2017, according to CNBC.
The reason is that music streaming is not profitable.
Google (part Alphabet Inc), for example, is a $700 billion company that can easily support its streaming services, based on the fact that it has other subsidiaries that can be profitable enough to cover losses, and streaming is a way to brand their other products.
Spotify, on the other hand, has only one service: Music streaming.
The numbers behind the struggle
According to Reuters, the app has around 70 million subscribers, each paying $10 per subscription, which calculates to about $700 million per month.
Spotify reported $5 billion in revenues last year.
According to Talking Tech, in 2017, Spotify pays about $9.8 billion in royalties to artists, and if we crunch the numbers, it translates into a $200,000 monthly loss.
Spotify going public might give it some fuel, for now, but unless they charge more for subscriptions or pay less to artists, more trouble awaits the company, and potentially the music will stop for Spotify.
Apple and many other music streaming services already offer the same and sometimes even better services than Spotify, for less.
When Apple first launched Apple Music, it offered a 3-month-free-trial. It was heavily criticized that artists would not get paid in that timeframe.
Tim Cook himself went on to say that every artist will be paid by Apple directly during the first three months.
Not only this, but Apple offers a $39.99 subscription per year, meaning subscribing to Apple Music would be 3.33$ per month.
That’s 67% less than subscribing to Spotify.