Music-streaming company will issue guidance on March 26th for its first fiscal year
Music streaming giant Spotify officially announced that it has filed to go public, and is targeting a $1 billion IPO.
Spotify is set to begin trading on the New York Stock Exchange under the ticker “SPOT.” However, the company actually plans to begin trading on the market without any type of fundraising event, so that billion-dollar number is subject to change and should be considered a placeholder.
It its F-1 filing, the company said that "Our mission 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 these creators.”
Spotify recently announced that it now has 159 million monthly active users, with 71 million paying for the service at $9.99 per month.
This achievement has cemented its status as the biggest subscription music service by user count, and the leader in the increasingly crowded music streaming industry.
Arguably Spotify’s biggest market rival is Apple’s (AAPL - Free Report) Apple Music.
Launched in 2015, Apple Music is a streaming music service based on Beats Music, which has drawn listeners with playlists made by experts, not algorithms. The service is also known for its collaborations with high-profile musicians like Drake and Taylor Swift. It costs $9.99 per month, and users can download music from an extensive digital library, just like Spotify.
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Apple Music offers listeners a free, three-month initial trial.
There’s also Tidal, the Scandinavian streaming service that rapper and mogul Jay-Z scooped up back in 2015 for $56 million.
Other top rivals include Rdio, which provides access to online radio stations; Pandora , one of the original internet radio companies; Rhapsody, the original streaming music subscription service; and Alphabet’s (GOOGL - Free Report) Google Play Music.
Despite its popularity, Spotify tends to draw out negative publicity, mainly over debates about its free advertising-supported service. This service allows people who are prepared to sit through occasional ads to listen to songs for free on demand.
Music labels—Spotify is in compliance with Sony (SNE - Free Report) , EMI, Warner Music Group, and Universal, among others—understandably dislike the free service because it dismantles album sales, and pays less in royalties than the subscription does.
We all remember Spotify’s battle with Taylor Swift. The popstar withdrew her entire catalog from the service because she “didn’t like the way it felt.
I think there should be an inherent value placed on art,” she said in an interview with Time. Swift’s music, however, did find its way back to the platform in June, just in time for Katy Perry’s new album and her highly-anticipated sixth album Reputation (though the official reason was in celebration of 1989 selling over 10 million copies worldwide).
Other musicians did follow in her original footsteps, like Icelandic singer Björk and British superstar Adele.
In 2016, Spotify was embroiled in issues surrounding its updated Terms and Conditions of Use, where in a blog post, the company’s user communications manager Candace Katz explains “We may ask for customer permission to collect information from new sources, such as address book, location, and sensor data [and photos, voice controls, and contacts] from the mobile device to improve the customer experience and inform product decisions."
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The backlash was bad enough that CEO Ek wrote another blog post, aptly called “SORRY” in order to explain that users don’t have to share this information if they don’t want to. “We will ask for your express permission before accessing any of this data – and we will only use it for specific purposes that will allow you to customize your Spotify experience.”
Road to IPO
Spotify’s road to IPO has been a bumpy one, and the music streaming company has been on the hunt for new funding for the past few years or so.
While it closed funding rounds in 2012 and 2013, raising $100 million and $250 million, respectively, Spotify completed a whopping $526 million round of funding in 2016, a move that showed investors its desire for expansion and new forms of content.
A few months before this funding round, Spotify announced its plan to add videos and podcasts from partners like Disney’s (DIS - Free Report) ESPN, Comcast’s (CMCSA - Free Report) NBC, Comedy Central, and Condé Nast.
Also in 2016, the company raised $1 billion in convertible debt on the promise that its new investors will receive a 30% discount on shares when it eventually files for an IPO.
Spotify had to pay 5% annual interest on the debt, however, and 1% more every six months, up to a total of 10%, until it goes public.
This decision to raise money through convertible debt was a smart move, as Spotify was able to maintain its high valuation without diluting its existing shareholders.
It suggested the company was seriously thinking about an IPO, since the latest round of funding encourages Spotify to go public sooner rather than later.
A Rare Kind of IPO
While the company did file for an IPO, they are doing so in a modified way—through a direct listing.
A rare way to go public, a direct listing allows a company to go ahead and register its shares on a public exchange, letting them trade freely; it also lets a company avoid those “lock-up” periods where insiders are not allowed to sell stock for months after a company IPOs.
Spotify had been seriously mulling a direct listing for a long time now.
Direct listings are a certainly more causal approach to going public, and because they have less structure, they tend to be viewed a bit negatively. Spotify may have to work harder to persuade investors to take a bite.
Spotify’s direct public offering will not be underwritten, which means that there will be no share price set by underwriters to inform opening trades on the NYSE.
However, Morgan Stanley, Goldman Sachs, and Allen & Company were announced as advisers on the offering. The company said it will list "as soon as practicable after this registration statement is declared effective."
According to its filing, the company had 4.09 billion Euros in revenue last year, compared to 2.95 billion Euros the year before.
Make 156% in Profits Before the Spotify IPO
2015 saw 1.94 billion Euros in revenue. Losses for 2017, though, were 1.2 billion Euros compared to 539 million Euros the year before.
There are certainly risks to Spotify’s business model.
It still remains unprofitable, mostly because of the fees paid to music labels; Spotify supposedly pays a royalty rate of 55% of its sales, but is fighting to pay less. Nevertheless, the company has grown rapidly since its launch in 2006, and there’s no denying its popularity, universal reach, and impressive $23 billion valuation.
This post has been updated with more information about Spotify’s direct listing IPO.
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