A breakdown: What you don’t know about Spotify going public
With the Swedish music streaming service Spotify floating publicly yesterday on the stock exchange, all eyes turned to its closing share price on the first day.
Spotify didn’t want a flashy trading debut so opted for a much more conservative and unorthodox approach, going for a direct sale rather than listing publicly as an IPO. This meant that the company prior to listing had to raise money in the background with a relatively small number of shares, 5.6 million to be exact out of a total 178 million, changing hands with existing investors such as venture capitalists, institutional investors, and family offices. 5.6 million shares changed hands, according to a company representative.
By the end of the days trading the company closed at an estimated value of $27 billion, 10% lower than the opening price of $166 which it started at. A company of that nature IPO’ing usually drops around 30% in value but since Spotify was opting for a much more stable route avoiding volatility they surprised many in the industry. Just to give you a comparable idea Snapchat closed trading at $24 a share on their first day and Facebook at $38. This makes founders Daniel Ek and Martin Lorentzon obscenely rich with, according to the Bloomberg Billionaires Index, $2.4 billion going to Lorentzon and $3.4 billion fortune going to Ek.
Spotify has gone to market at a relatively good time helping revitalise a market in desperate need of help, after a 15-year downturn, paid streaming now accounts for 40 percent of U.S. music industry sales as last year. In just ten years since it started it has managed to build itself into one of the music industries biggest success stories, trading on a user base of 70 million paying subscribers worldwide, up from 30 million in March 2016.
So with all this good cheer, we’ve managed to put together a list of pros and cons based around the announcement, displaying some key insider information that they certainly won’t have listed over at their website.
Take a peek:
The Freemium business model creates a growing stream of paying subscribers, with 60% of Premium users starting as ad-supported subscribers.
Spotify stands to benefit from greater smartphone penetration in developing economies, which has helped boost their revenue numbers, €746m in 2013 to €4,090m in 2017, which is expected to grow to between €4,900m and €5,300m in 2018.
Spotify is investing heavily in its user experience and its data tools for artists, which should help it grow further.
The management is key shareholders in the firm, aligning their interests with those of other investors.
Spotify has a direct way of monetising its user base and isn’t reliant on the vagaries of purely selling advertising – in 2017 Spotify’s Premium subscription service generated 90% of the company’s revenues, with advertising making up just 10%.
The company is debt-free.
- Spotify currently doesn’t turn a profit which means investors are paying up for future earnings potential.
Just four music companies control the rights to 87% of the music streamed on Spotify, so it has a very concentrated supplier base, which is a risk.
Amazon and Apple are not competitors to be taken lightly in terms of resources or innovation. Unlike Spotify these companies also produce hardware like the iPhone and Amazon Echo which can come pre-loaded with their own music-streaming services.
Technology and celebrity can both be fickle beasts, as evidenced by Snap’s recent share price fall on the back of one fairly innocuous Kylie Jenner tweet. Spotify stock is also vulnerable to the kangaroo court of social media if it happens to displease one of the recording artists in its catalogue, though such setbacks are likely to be short term.
Around 2 million users have managed to suppress Spotify’s ads without paying for its Premium service. Spotify will no doubt be addressing this specific issue, but this kind of widespread fraud nonetheless represents a threat to revenues.
Spotify’s founders are still keeping tight control of the company with special voters rights which means everyone else has less of a say in how the company is run.
Spotify have had serious financial reporting issues for the last three years running, regulators will be watching this closely.