The wheels are in motion for a high profile listing on the New York Stock Exchange for music streaming giant Spotify. Along with the forthcoming Dropbox IPO these two companies could offer an interesting insight into the confidence of investors in technology-based companies. There are high hopes that Spotify will attract a $20 billion flotation value with suggestions that the company could be the next “Netflix”. Many people will fail to realise that Spotify has just been in existence for 10 years and is on the verge of a $20 billion float price!
Active users
Spotify is simply a music streaming service where members can access free music after listening to adverts or sign up for a monthly subscription giving them ad-free access to a massive library of music. While critics will point to the fact that the company saw losses increase from $650 million in 2016 up to $1.5 billion in 2017, there is much more to this story than meets the eye.
Spotify has a massive 159 million active users with 71 million of these users paying a monthly subscription fee to the company. Annual revenue for last year stood at $5 billion and when you bear in mind that Apple Music has just 36 million subscribers, there may be something in this growth story?
Music royalties
The company has set some extremely challenging targets one of which is to “democratise” the music industry. When you bear in mind that Spotify has paid out a phenomenal $10 billion in royalties to artists, music labels and publishers since inception, this is no flash in the pan. Many long-term arrangements signed by the company will be coming up for renewal although Spotify is obliged to pay an additional $2 billion in further royalty payments over the next three years. The main problem, according to critics, is the fact that just four music companies control the rights to 87% of music played on Spotify. However, is this positive or negative going forward?
Held to ransom or a priceless platform
There is a growing feeling that while these four companies will obviously influence the bottom line of Spotify going forward, the company has become an immensely valuable platform which can make or break music artists. Music companies are well aware that music streaming is the future so what better way to control this than long-term “mutually beneficial” contracts with Spotify, the company which dominates this area of the market.
Critics believe that these four companies will squeeze Spotify for higher royalty rates in due course knowing that the company is effectively dependent on their material. It is an interesting quandary but one in which Spotify believes it can actually negotiate lower royalty rates in exchange for higher volumes. The company has a unique platform, is immensely popular and is to all intents and purposes the “music streaming” industry.
Conclusion
While companies such as Snapchat, also valued in the billions of dollars, offer very little in the way of a unique product or service, Spotify is very different. The company has access to an enormous library of music including established and up-and-coming artists. It must surely be in the best interests of the music world to negotiate mutually beneficial royalty arrangements with scope for both parties to make money. Spotify has the platform, the music industry has the material and with a membership already numbering 159 million active users, this is a fairly unique animal. How will investors react to the forthcoming IPO?