Streaming service Spotify goes public Tuesday. We look at what it could it mean for subscribers and the music industry.
Spotify has helped the U. S. music industry stem its growth slide. Now we are going to find out how it plays on Wall Street.
The music streaming service, which launched in the U. S. in 2011, became public Tuesday. Spotify shares ( SPOT) rose 22% to $160.57 after trading began on the New York Stock Exchange.
Spotify, developed in Sweden and first available in Europe in 2008, has the largest global reach of streaming music services. It’s grown to 71 million paying subscribers and 159 million monthly active users. In the U. S., Spotify claims 41% of the U. S. market share, outpacing the reach of rival music services from Apple, Amazon, Pandora, Soundcloud and Tidal.
The streaming music business is a tough one, and Spotify has yet to turn a profit, despite increasing revenue 38% to about $5 billion in 2017 from the prior year. Losses topped $1.5 billion for 2017, up from $662 million the prior year.
More: Spotify’s IPO filing shows how hard it is to make money from streaming subscriptions
More: Streaming music: A tough business signals shake out ahead
Question: Why is it such a big deal for music lovers?
Answer: Spotify’s growth has helped the overall music business recover from its own years of decline. Music sales in the U. S. rose 16.5% to $8.7 billion, according to the Recording Industry Association of America. What helped the music industry to only its second consecutive year of growth since 1999? Paid music streaming subscriptions, which topped $4 billion.
In addition to a free ad-supported music tier, Spotify has a $9.99 monthly ad-free subscription which offers unlimited on-demand streaming of its 35 million-plus song library. There’s also a $4.99 monthly subscription for students and $14.99 family subscription for up to six premium users.
Spotify has helped the music industry slow a consumer spending decline sparked by the demise of the compact disc, said Paul Verna, a principal analyst with research firm eMarketer.
« It’s been basically a story of attrition. A lot of companies came along with what they said would be the formula for turning it around, Apple with the download model, Pandora and ringtones. But the only thing that has really worked in terms of generating big revenue is subscription-based streaming and Spotify is the leader in that space, » he said. « If the music industry can get back to being a growing healthy business, then I think Spotify will play a big role in that. »
Q: Will we see any immediate changes in the service?
A: For the meantime, it’s unlikely Spotify will make any changes in terms of offerings or prices, says Michael Pachter, an analyst with Wedbush Securities. However, the company will definitely have « a heightened focus on growth and profit going forward. »
While the company may not raise prices, he says, it may limit free trials, which typically run for 30 days. « Their big strength is their critical mass, » Pachter said. « They have a great product and great service. The user interface is phenomenal, and Spotify has a ton of integration with other apps. »
However, by going public, Spotify could face some external pressures that affect the service, Verna says. « It could make the service better because more transparency means that they have to be more accountable, » he says.
Spotify’s reliance on only music streaming as its product could hamper it, especially if there’s an upheaval in artist royalty payments. « There is an overwhelming sentiment on the part of artists that it’s a very hard way to make a living, » Verna said. . »
Q: What will Spotify use the money for? A: In its filing with the Securities and Exchange Commission, Spotify says it will use the money raised in its offering to improve and grow its service. In addition to growing its audience in current and new markets, Spotify wants to expand its non-music content with more podcasts, short form videos and spoken word offerings.
Increased spending on technology will be done to improve how the service recommends music to users and enhance how artists can connect with fans. Spotify’s mission, said CEO and co-founder Daniel Ek in an online post Monday, is « to unlock the potential of human creativity — by giving a million creative artists the opportunity to live off their art and billions of fans the opportunity to enjoy and be inspired by it. »
Another possible expansion is concert ticketing, says Rob Sanderson, managing director of equity research firm MKM Partners. Spotify is already high-tech enough to become a ticket seller and the move would by synergistic, he says.
« Artists can plan, promote and sell tickets in-app and ticket-holders can authenticate on premise through the app, » he said in a note to investors last week. « We think that (Spotify) is at, or approaching, enough scale to sell the entire tour of major acts. »
Q: I’ve heard Spotify’s initial public offering is unusual. How is it different from most IPOs?
A: Spotify was directly listed on the New York Stock Exchange on Tuesday morning. That means its shares were made available without any underwriting from investment banks. This costs the company less, but could result in lots of movement on the stock price at launch.
The company listed the history of its shares in secondary markets — prices ranged $90 to $132.50 in private transactions Jan. 1 to Feb. 22 — but the price was set Tuesday morning at $132 per share.
RBC Capital Markets analyst Mark Mahaney expects Spotify’s stock price to soar above that range with a target price of $220. (Sanderson also has a Buy recommendation on Spotify stock with a target price of $200.)
More: Millennial investors are very interested in Dropbox and Spotify IPOs, says company selling fractional shares
Spotify could grow to 146 million premium subscribers worldwide by 2020, Mahaney estimated in a recent note to investors. « Spotify is the clear market leader, with almost 2X the number of Paid Subs vs closest competitor Apple Music, » he said. « Very high global aided brand awareness, relatively high customer satisfaction scores, and superior data-driven personalization all combine to help Spotify maintain its leadership position. »
Those interested in investing in Spotify should expect some volatility, said Christine Short, senior vice president with crowdsourced financial service Estimize.
