Spotify IPO really a DPO – $20bn valuation

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Spotify, the music-streaming service founded by Daniel Ek and Martin Lorentzon, currently has more than 150 million users with 44% of them paying for a subscription package and the remaining ones using its freemium service.  

The music-streaming giant filed on 28 of February to list its shares on the New York Stock Exchange and market experts indicate that it is headed for a $20 billion valuation. Spotify’s shares will bear the name SPOT according to documents filed with SEC.

IPO or DPO? Spotify chooses the cheaper route

The direct selling of its shares is commonly used by startups low on cash and not able to cover the high costs of an IPO, where underwriters are used.  It also brings an air of change on Wall Street. This move won’t only save Spotify more than $30 million in underwriter fees but, perhaps more importantly, it will prevent the dilution of its existing shares, allowing its employees and early investors to maximize their gains.  

Here’s what Tradimo’s CEO Sebastian Kuhnert had to say about the recent news:

“Spotify’s growth story is really impressive. From Stockholm to the world…I’m happy to see such innovation, including the AI predictions for users‘ music tastes, originating from one of the most beautiful capitals of Europe. Congratulations to Daniel Ek for still leading the company as a founding CEO.”

Operating at a loss but with positive cash flow

Spotify reported losses of $1.24 billion in 2017 and $539 million in 2016. The company also acknowledges that the average revenue per user has been steadily decreasing from €7.06 in 2015 to €5.24 in 2017, thanks to its Family and Student plans.

But because of these Premium packages it has managed to decrease the churn of premium users from 7.7% in 2015 to 5.5% in 2017. Last year the company also had a free cash flow of €133 million. A cash flow is ultimately showing how much a company has available after costs, including capital expenditures. This is the most important number indicating how much a company has left at the end of a year, it can either give back to its investors or use it for future growth instead of issuing more shares (when a company issues more shares its stock price usually declines).

Compared to Netflix, which increases its own productions’ budget every year, Spotify is dragged down by the largest record companies in the world. Laith Khalaf an analyst at Hargreaves indicated in a recent interview at the Guardian that just four companies, Universal Music Group, Sony Music Entertainment, Warner Music Group and Merlin control the rights of 87% of the music streamed on it, giving them a strong bargaining position on royalty rates.

In the filing document, there is also mention of a number of challenges the streaming giant faces from other companies. In particular companies like Apple and Amazon have a considerable advantage thanks to the development of devices in which their music streaming service is preloaded.

How much do artists really make on Spotify?

A number of artists have spoken out against Spotify claiming that only pop singers able to record several albums per year can really make a profit from its royalties model. Radiohead’s Tom Yorke urged singers to “fight the Spotify thing’’ while Taylor Swift called it “a startup with no cash flow’’.

According to a 2015 infographic by journalist David McCandless, a single artist has to have their songs played more than 4 million times in a month to earn the minimum wage of $1,126. 

The future of Spotify

Despite the obstacles, investors continue to show a keen interest in the company. In a recent letter titled “Our path”Mr. Ek detailed the grandiose role of the company in the world of art.

“Today’s creators can collaborate with audiences across time zones. They incorporate video and interactive technology to create new and inspiring art, and more. They release their own work and directly make and reach fans. As we evolve, Spotify will meet creators where they are and empower them with even more tools to do what they love in their own authentic way, and reach even more people. What started out as an application and grew into a platform must now become a global network—one that recognizes and nurtures the interdependent relationships between creators, producers, publishers, labels, fans, and everyone in between.”

Mr. Ek continued, “this is the future we envision; where artists cross genres and cultural boundaries, creating ideas that propel society forward; where fans can discover something they would never have otherwise; where we’re all part of a global network, building new connections, sharing new ideas, across cultures.

We really do believe that we can improve the world, one song at a time.”


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