It’s not every day that a company as iconic as Spotify IPOs on a stock exchange. But on April 3, 2018, the Stockholm-headquartered company is expected to begin trading on the NYSE under the ticker symbol SPOT. Founded in 2008, the mission of Spotify is to: “unlock the potential of human creativity by giving artists the opportunity to live off their art and fans the opportunity to enjoy and be inspired by these creators.”
Spotify is perhaps most famous for its expansive music library which houses over a million artists and automated song suggestions. The company is the largest streaming music subscription service in the world, with 159 million monthly active users. That includes those who stream for free and those who pay for the service, in a “freemium” subscription business model. Those numbers place Spotify at nearly twice the size of its nearest competitor, Apple Music. Premium subscribers who pay for the service have grown 46% in 2017, to 71 million. That’s positive news for a company whose revenue is comprised 90% of premium subscribers. As it turns out, the company has been highly successful at converting its free users into paid users.
The company still believes it is in the early stages of connecting artists with their global audiences. There’s no doubt the business of music has undergone considerable disruption, with global industry revenues declining from $23.8Bn in 1999 to $16.9Bn in 2008 when Spotify was launched. Piracy is an often-cited reason for the decline. To the co-founder and CEO of Spotify Daniel Ek, the issue of piracy was personal. He recalls his inspiration to found the company stating, “There had to be a way to give people access to the music they loved while allowing creators to get paid for their work, and to expand their creativity.” Spotify is now a significant driver of global music industry revenue so the livelihood of artists will hinge on it.
Taylor Swift famously did not allow her albums to be released on Spotify for years. However, in June 2017 she agreed for her discography to be released onto the service.  This change is doubtless influenced by Spotify’s success in converting free subscribers into premium ones, which it then uses to pay royalties to artists. Similarly, Adele kept her album off Spotify for months before allowing it to be streamed.  Even the most reluctant artists cannot ignore that the Spotify subscription music streaming is wanted by their fans, and by keeping albums off it, they are also leaving money on the table.
While helping to make money for artists has been a significant goal for the company, making money from business operations has so far eluded Spotify. Company revenue more than doubled from 2015 to 2017 to $5.02Bn for the company. Even still, between it’s founding and the end of 2017 the company had a deficit of 2.98Bn dollars more than it took in.  Despite not achieving profitability, the company is still not seeking to raise any additional money from investors in its IPO.
In a standard IPO, a company raises additional money from eager new investors by issuing them newly minted shares. This gives the company additional funding to pursue its mission. The process of convincing Wall Street investors to buy the company’s shares is known as an Investor Roadshow. You may recall that Mr. Zuckerberg of Facebook famously shunned this process by wearing a hoodie while meeting with bankers during his Investor Roadshow.
Spotify is also shunning Wall Street in a similar vein as Zuckerberg’s famous hoodie statement did. The company is not using an underwriter to help list its shares, so no investment bank will make a substantial commission on its debut. Existing shareholders can sell without restriction into the IPO, as there is no “lock-up” period. Lastly, no investment bank is expected to step in to help stabilize the listing by buying and selling shares back and forth.
With large tech IPOs, typically the company is based in the United States. Spotify, while having its principal office in Sweden, is actually legally organized in Luxembourg. This makes shares in Spotify known as “American Depository Receipts” or ADRs. This refers to a company which is held in a foreign country that is available to be purchased by United States investors. This will result in some peculiarities for investors, such as the financial statement to investors will be reported in Euros rather than Dollars.
The Spotify IPO will be intently watched by keen observers of Wall Street. Its size and scope make it a can’t ignore platform for artists in pursuing their livelihoods. It’s proponents have called it the Netflix of music. Whether it can achieve the lofty ambitious it has set for itself will be interesting to see.
And remember you can buy Spotify stock now with Stockpile. 🙌