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Spotify IPO rumour – What's the frequency?




3 min read

Will digital music service Spotify be the next unicorn to IPO? New York and Silicon Valley are abuzz with excitement. 

Spotify, the brainchild of Daniel Ek and Martin Lorentzon, launched in Stockholm, Sweden, in 2006. While many credit Pandora with being the first mass-adopted music-streaming service, Spotify’s rapid growth rate saw it quickly overtake its much older counterpart. At present, Spotify boasts more than 100 million monthly active users, with over 30 million of these users opting to pay a minimum of $9.99 a month for the premium service.

Despite being based in Sweden, there is a lot of noise in Silicon Valley and New York surrounding the streaming service and the possibility of it being the next unicorn to IPO. Speculation surrounds the timing of the possible Spotify IPO and Spotify's valuation, given that in March 2016 the company raised $1bn from TPG, Dragoneer and clients of Goldman Sachs in the form of convertible debt. The exact details of the raise vary slightly depending on your sources, but this much is clear: the terms stipulate a steep discount on shares at IPO. This discount starts at 20% and rises 2.5% every six months that the IPO is delayed beyond one year from when the money was raised.


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The challenges

Given the pressure from the investors to get the IPO away, there is a general consensus that Spotify will look to IPO in the second half of 2017 to avoid having to give previous investors further discounts. However, going public then could upset investors who poured money into the company in June 2015 at a reported pre-money valuation of $8.5bn. You see, since launching in 2006 spotify has failed to turn a profit every year, even last year when sales had increased to $2.2bn.

No profit from $2.2bn in sales is quite a feat. Most of Spotify’s expenses come in the form of commissions to the music industry. Last year Spotify paid more than $1.8bn to record labels and publishers with the big three labels, Universal Music Group, Sony Music Entertainment and Warner Music Group, receiving the lion's share.

And these record labels are making the potential Spotify IPO even harder to pull off by refusing to sign long-term agreements with the streaming site. Most of them are on monthly rolling contracts that could be rescinded easily, making investors nervous.

Market competition

Stiff competition and new entrants to the market are also a cause for concern. Pandora, which launched five years before Spotify, claims 80 million users and $1.2bn in sales. Apple Music, part of the Apple group, claims the largest library out of the competitors, with 43m tracks, and, given Apple is sitting on billions in cash, does not face the same stresses as Spotify to become profitable. Tidal, purchased by Jay Z for $56m, offers exclusive content from some of the biggest names in the industry including Beyoncé, Kayne West and Drake.

Given no mass market streaming service has yet to become profitable further dampens investor forecasts. Should the Spotify IPO progress, the company will have to rely on heavily improved revenues or find a way to significantly reduce costs so that it can turn a profit. Not that all companies that go public are profitable, but if Spotify does IPO it needs to raise enough capital, and create as much noise as possible, to send a clear message to competitors that the reports of its demise are greatly exaggerated.

If Spotify does IPO, will you tune in?

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