After spending nine years in the start-up arena, music streaming service Spotify revealed its public designs on Wednesday (Feb. 28), as it filed for an Initial Public Offering with the Securities and Exchange Commission.
The Sweden-based company is not going the conventional route, though – having filed for a direct listing, which essentially means a direct public offering – an unusual scenario where existing investors and insiders can trade their shares in the open market directly, and with no need for a “ firm underwriting” from an invest bank, or some investment broker, for that matter.
Spotify has made a number of claims and disclosures in its multi-page submission, which targets an IPO of $1 billion, albeit as a placeholder.
The paperwork – wherein Spotify has declared its 2017 revenue at about €4.1 billion (around $5 billion), with a net loss of €1.24 billion, ($1.5 billion, roughly) – also provides a good look at the Swedish company’s apparent financial health.
To break it down some more, the document observes that Spotify owes 90 percent of its revenue to monthly subscriptions, generating revenue to the tune of $4.5 billion from its $10 monthly subscription as opposed to the substantially lower $511 million revenue it scraped up for the ad-supported service, the same year.
By comparison, the European streaming service registered a profit of €2.95 billion, and a net loss of €1.24 billion, the year before.
Highlighting the main attribute that sets it apart from the competition, Spotify writes that “a key differentiating factor between Spotify and other music content providers is our ability to predict music that our Users will enjoy.”
Spotify also boasts a 159-million-strong monthly user-base, spanning 61 countries and territories across the globe, with 71 million premium subscribers alone – close to twice the numbers that Apple Music – the next best in the business – manages.
The company claimed that its 2016 share in the global streaming market, revenue-wise, was 42 percent, with a mind-blowing 95-percent say in the “stream” of things at home in Sweden.
Spotify’s three largest markets outside of Sweden – In terms of monthly active users – the U.S., Brazil and the U.K. recorded 41, 42 and 59 percent streaming market share, respectively,
As of now, nothing much can be said about the price the Spotify shares will, potentially, fetch when it, ultimately, lists under the New York Stock Exchange “SPOT.”
That said, if the IPO paperwork is anything to go by, the Scandinavian company traded shares ranging between $90 and $132.50 per share, in 2018, with Spotify’s valuation of the company in its Wednesday filing standing at $23.4 billion.
However, the company says that the assessment “may have little or no relation to the opening public price of our ordinary shares on the NYSE.”
The revenue structure of most music subscription services is broadly based on sharing a major chunk of their earnings with music labels, publishers and rights owners, according to their individual agreements.
With an income sharing model such as this, it’s not hard to figure out why a company like Pandora has been struggling, despite an eighteen-year presence in the business.
Spotify can’t be better-off by much, what with its “significant costs” for licensing content and paying out royalties, as its submission to the SEC suggests.
“We cannot assure you that we will generate sufficient revenue from the sale of our premium service and advertising for our ad-supported service to offset the cost of our content and these royalty expenses. If we cannot successfully earn revenue at a rate that exceeds the operational costs, including royalty expenses, associated with our service, we will not be able to achieve or sustain profitability or generate positive cash flow on a sustained basis.”
The IPO doc also talks about co-founder and CEO Daniel Ek’s voting power, representing 23.8% of the music-streaming entity. With Image Frame and TME Hong Kong owning a decent portion of that strength, Ek effectively has a 9 percent interest in the business.
One major take away from the Spotify IPO doc is the company’s apprehension towards net neutrality – to the lack of it, in fact.
“Our service requires high-bandwidth data capabilities. If the costs of data usage increase or access to data network is limited, our business may be seriously harmed,” the company wrote in its Form F-1. “Additionally, to deliver high-quality audio, video and other content over networks, our services must work well with a range of technologies, systems, networks, regulations and standards that we do not control,” going on to say that “the adoption of any laws or regulations that adversely affect the growth, popularity or use of the internet, including laws governing internet neutrality, could decrease the demand for our service and increase our cost of doing business.”
This is what Ek said in his letter to the Spotify shareholders.
“We envision a cultural platform where professional creators can break free of their medium’s constraints and where everyone can enjoy an immersive artistic experience that enables us to empathize with each other and to feel part of a greater whole,” he wrote.
“But to realize this vision, professional creators must be able to earn a fair living doing what they love, where monetization is at the core of a creative proposition and not an afterthought. We care deeply about our creators and our users and we believe Spotify is a win-win for both.”