Spotify (SPOT), the music streaming service, is expected to begin trading on April 3. This IPO is one to watch by all fans of music, technology, and finance.
What is Spotify?
Spotify is a music, podcast and video streaming service from Stockholm, Sweden. It came to the United States in 2010 and has been booming ever since. Spotify has about 159 million monthly active users and 71 million subscribers for its premium services. In August 2017, Spotify was the most downloaded music app on the iOS platform in the United States. Spotify made around $5 billion in revenue in 2017. However, it is not a profitable company yet. Spotify pays royalties unlike typical download sales, instead paying based on the number of artists’ streams as a proportion of total songs streamed on the service.
Spotify works as a “freemium service”, as basic features are free with advertisements or certain limitations. Users can sign up for a premium service, which give improved streaming quality and music downloads. Spotify offers 3 types of services: Spotify Free (not free of ads, limited mobile listening) whereas Spotify Premium and Spotify Family allow zero advertisements, mobile listening, enhanced sound quality and offline listening. Spotify Family is the same as Spotify Premium, but allows up to six people to share a subscription and thus reduce the price.
As for the technology, Spotify is proprietary and uses digital rights management protection. Spotify moved away from the peer-to-peer system in April 2014. The service works by allowing users to stream and download music, while also allowing users to add local audio files for music not in its catalogue into the user’s library.
On the whole, Spotify is praised by the music community but certain artists refuse to engage in their service. Most notably, Thom Yorke and Taylor Swift have pulled their music from the site, in protest of the way Spotify pays their artists.
How is direct listing different than IPO?
Spotify filed for a direct listing on the New York Stock Exchange on February 28. Spotify will not issue new shares and have a traditional initial public offering, but instead will go with a direct listing. This is unusual but becoming a new way for companies to alternate from the IPO. This reinforces the image that creator Daniel Elk envisioned, to disrupt the traditional ways of listening to music.
Direct listings contrast with the traditional initial public offering in a few ways. Instead of seeking to raise money through the process of going public, the direct listing enables existing shareholders to sell their shares to the public. This can prevent a company from having share lockups or share dilution, both which can provide hurdles to the company before the IPO.
Spotify disclosed that it expects the IPO to cost the company between $44 and $50 million. Further, because of the direct listing, Spotify will get zero dollars in return for going public.
Spotify will receive certain benefits from this method. This includes helping employees of the company who own stock, as they won’t have restrictions from selling their shares once the company goes public. Further, it creates the illusion to the public that the company is strong and solid, as it doesn’t need money from the public.
Who are the competitors?
Spotify is a huge streaming service, but joins a group of competitors who are publicly listed. These include Apple (AAPL), Alphabet Inc. (GOOGL), and Pandora Media Inc. (P). Apple Music is only a small sector of Apple, whereas it is the complete focus of Spotify. Alphabet Inc. owns YouTube, which has its own versions of music-streaming services. Pandora is the most similar to Spotify, as it is the most like a streaming service company on the public market.
Sophie Fritz is a J.D. candidate, 2019, at NYU School of Law.