Developing Story

Spotify is going public via direct listing as $SPOT

Streaming music service Spotify has filed for a direct listing on the public markets with the SEC. This is not a traditional IPO, but will still make Spotify a publicly trade-able security. Spotify has been the leading music streaming service for some time, but has faced stiff competition recently from Apple and, to a lesser extent, Google and Amazon as everyone tries to own this space.

Going public pits Spotify’s suggestions against everyone

The secret to Spotify’s public market debut is actually an acquisition it made in 2014. The Echo Nest was powering music recommendations for Beats Music, Rdio, Vevo and iHeartRadio before Spotify pulled it out from under them by buying it for a reported $100 million — 90 percent in Spotify equity. That deal paid off big time, as it’s turned the startup from a daunting search box for 35 million songs into a personalized mix tape.

Today, in Spotify’s SEC filing to go public through an unusual direct listing, the company writes that “a key differentiating factor between Spotify and other music content providers is our ability to predict music that our Users will enjoy. Our system for predicting User music preferences and selecting music tailored to our Users’ individual music tastes is based on advanced data analytics systems and our proprietary algorithms.”

That data came from The Echo Nest — 200 petabytes of user behavior data to be exact. That’s compared to the 60 petabytes Netflix had in 2016. Spotify logs 150 billion plays, shares, skips, follows and other signals per day that tune its recommendations.

This all powers Spotify’s popular curated playlists like Rap Caviar that consume 31 percent of users’ listening time, up from 20 percent two years ago, and the Discover Weekly algorithmic playlist that keeps them stocked with music. Always knowing what to play next has helped Spotify climb to 159 million monthly active users (up 29 percent year-over-year) and 71 million paying subscribers (up 46 percent year-over-year).

Those users are loyal, spending 25 hours per month streaming Spotify’s content. Just 5.1 percent of subscribers churn out monthly — a low rate for a subscription service that has come down from 7.5 percent two years ago. Spotify accounted for 42 percent of the global streaming in 2016, and by 2017 its subscription fees and ads earned it $4.09 billion in revenue.

But most importantly, those recommendations are what makes Spotify the go-to streaming service for serious listeners amidst an unbelievably crowded field of competition. “We believe Spotify is differentiated from other services because we provide Users with a more personalized experience, driven by powerful music search and discovery engines,” writes Spotify CEO Daniel Ek in today’s letter to potential investors. With similar catalogs and playback features, its Spotify’s understanding of what we want to hear that keeps people from straying.

And there’s plenty of places to stray. Apple and Google pre-install and promote their streaming apps on their mobile operating systems, while charging Spotify a tax on subscriptions bought through its platforms. YouTube’s vast catalog of legally grey music uploads and snazzy videos appeal to younger listeners. SoundCloud offers the newest emerging artists. Amazon is using its Echo speakers and Prime subscriptions to get its music service into millions of homes. And there are still CDs, vinyl, MP3s, iTunes downloads, FM and satellite radio and stalwart online radio services like Pandora.

But none combine the dedicated music recommendation prowess Spotify has built up with the on-demand access listeners crave and a free ad-supported tier to lure people in. “With access to unprecedented amounts of data and insights, we’re building audiences for every kind of artist at every level of fame and exposing fans to a universe of songs,” Spotify CEO Daniel Ek writes in his letter to investors.

And because music lovers trust the app to tell them what to play, Spotify has managed to build up some leverage to negotiate with the record labels and rights organizations that control the content it streams. Spotify can favor whatever music it wants, replacing top 40 radio as the most crucial hit maker in the business. And its ads and subscription revenue payouts have helped turn the music industry around after MP3 piracy and unbundled $1 singles cratered the post-CD landscape. Musicians and their management are finally starting to need Spotify as much as it needs them.

That’s the only reason Spotify can go public despite being so dependent on these rights holders. Otherwise, they could just jack up their licensing and royalty rates, and if Spotify refused to pay, they could pull their music. That’s especially worrisome for a public company with all its financials laid bare. Earn too much profit, and the rights holders would just cut it down to size. But they’ll play nice since Spotify selects what becomes popular.

Spotify CEO Daniel Ek (left) and The Echo Nest CEO Jim Lucchese (right)

The democratization of music creation and distribution necessitates a new layer of curation that Spotify wants to provide. “The old model favored certain gatekeepers. Artists had to be signed to a label. They needed access to a recording studio, and they had to be played on terrestrial radio to achieve success,” Ek writes. Nowadays with so much content coming out, “artists’ biggest challenge is navigating this complexity to get heard. We believe Spotify empowers them to break through.”

To keep its crown, though, Spotify will have to stay a step ahead of everyone else’s recommendations. Its public filing lists their bigger brands, bank accounts, hardware and app stores as significant risks. While Spotify has nearly twice as many subscribers as Apple Music, the competitor is growing fast by giving away free one-month trials, paying for exclusive early access to blockbuster albums, and pre-loading the app on iPhones. Apple printed $20 billion in profit last quarter while Spotify has lost $4 billion to date.

Spotify will have to not only surface the best content, but create some too. By producing exclusive in-house audio and video, it could seduce subscribers and avoid royalty pay-outs. Spotify will have to figure out not only what we want to hear, but what we want to see. By displaying better “behind the music” factoids, lyrics, slideshows and more while we listen, it could add a unique dimension to the same songs streaming elsewhere. And it must be seen as a true ally to musicians, podcasters, videographers and beyond. By winning their hearts, Spotify could get them to promote it as the home for their content that lives elsewhere too.

Surrounded by tech’s titans, Spotify may still be the underdog in the long run. But by becoming the world’s DJ, Spotify has established itself as indispensable to the music industry. This jukebox sounds worth your dime.

Check out all of TechCrunch’s stories about Spotify going public, and read our feature piece “How Spotify is finally gaining leverage over the labels.”

Spotify plays the long game with Family and Student Plans even as revenue per user drops

Spotify’s “Family Plan,” a variation of which launched in 2014, as well as its “Student Plan” appear to be driving a significant portion of the company’s growth and improving retention, as the company points to it multiple times in its filing for a direct listing on public markets today.

But that also comes at a cost of decreasing the amount of revenue it actually gets from each premium subscriber. In the filing, Spotify indicates that the fee for a family plan — which costs $14.99 per month — can be actualized over as many as six accounts total (though it might not always be six). The premium user consists of the one master premium account, which pays for the subscription, and up to five sub-accounts for family members. Spotify is also pointing to its student plan, which costs $4.99 a month, as another contributing factor to those pressures. This means that even though Spotify is gathering more premium users, the actual revenue it generates from those users can drop over time.

And, indeed, that’s what’s happening, according to the filing. Spotify said its premium average revenue per user was around €5.24 in 2017, compared to €6.00 in 2016 and €7.06 in 2015. Spotify recognizes in the filing (“Family Plan” is mentioned nearly three dozen times) that this is partly due to the family plan. But at the same time, churn — a significant metric for subscription services that shows how many users are coming and going — is dropping each year and the number of hours users are listening are significantly increasing. Churn was 7.5% in 2015, and it’s down to 5.1% in 2017, content hours have more than doubled in that time from 5.4 billion hours to 11.4 billion hours.

Here’s the boilerplate from the filing:

The rate of net growth in Premium Subscribers also is affected by our ability to retain our existing Premium Subscribers and the mix of subscription pricing plans. We have increased retention over time, as new features and functionality have led to increased User engagement and satisfaction. From a product perspective, while the launches of our Family Plan and our Student Plan have decreased Premium ARPU (as further described below) due to the lower price points per Premium Subscriber for these Premium pricing plans, each of these Plans has helped improve retention across the Premium Service. As a result, while Premium ARPU declined by 9% from 2015 to 2016 and 14% from 2016 to 2017, in part due to the launch of the Family Plan in 2016, Premium Churn declined by 1.1% from 7.7% in 2015 to 6.6% in 2016 and declined by an additional 1.1% from 6.6% in 2016 to 5.5% in 2017. With the growth in higher retention products, such as our Family Plan and Student Plan, we believe these trends will continue in the future.

All this is more or less part of a long game for Spotify, which is looking to go public in the U.S. amid significant and increasing competition for premium subscribers from companies like Apple or Google. Those two companies also own the App Store platform and therefore could be the decision-makers in the economics of operating on mobile devices, which means that there’s pressure for Spotify to snap up as many users as possible — even if it means making less money per user. Spotify has acknowledged in its public filing, too, that Apple and Google represent a significant risk in this sense.

Here’s what Spotify shares will be worth when they start trading

Spotify has finally filed to go public. But unlike most tech offerings, Spotify won’t be raising any money by issuing new shares. Instead they’ll just allow existing shares owned by investors and employees to be traded publicly on the New York Stock Exchange.

No IPO means there are no investment banks to underwrite and price the offering, meaning the public markets will essentially be the only thing determining what Spotify shares will be worth when they start trading.

However, Spotify’s F-1 registration does disclose what its shares have historically traded for on the private market. The most recent private transactions should give us a pretty good indication of what shares will be worth when they start being publicly traded.

As you can see in the chart below, in 2017 Spotify shares were bought and sold privately for anywhere between $125.00 and $37.50, which is a pretty wide range. But in the last two months the value has become a little more defined, with shares trading anywhere between $132.50 and $90 in January and February 2018.

That means we can expect shares to trade somewhere in this range when Spotify goes public, with the price likely leaning towards the higher end ($132.50)  to account for the increased demand once they are available to a broader investor base.

Of course the more demand there is the higher the shares will trade, and since Spotify’s public offering has been much anticipated don’t be surprised if we see share prices closer (or upwards) of $150.

In it’s F-1 registration, Spotify notes that these share prices and amounts all reflect a 40-to-one share split, which the company says is being done to “reduce the per share price of our ordinary shares to a more customary level for a newly listed company on the NYSE”.

Of course the above numbers are just historical pricing, and legally can’t be an indication of what Spotify actually thinks their shares will be worth. Spotify confirms this, saying “this information may, however, have little or no relation to broader market demand for our ordinary shares and thus the opening public price and subsequent public price of our ordinary shares on the NYSE”.

Expect to see Spotify shares actually start trading on the NYSE in the next month or so, under the ticker “SPOT”.

To read more of our coverage of Spotify’s public listing you can check out all related posts here, or the main post here.

Even with double the subscribers, Spotify says Apple will always have some edge owning the app store

Spotify just filed for a direct listing in the U.S., sidestepping the traditional IPO process, and now we’re starting to see some of the true financial guts of the company — and some of the significant risks it faces from challenging services from Apple and Google.

Apple, for example, charges apps a percentage of revenue for subscriptions processed through the App Store. Apple Music, meanwhile, will always deliver Apple 100% of the subscription revenue that it receives from subscribers (sans record fees and all that kind of stuff, of course). Apple, too, has a direct integration with its iOS devices and also a huge amount of brand recognition even though Spotify is a massive service. Spotify says it has 159 million monthly active users and 71 million premium subscribers, while Apple has 36 million paying subscribers as of February 2018.

Here’s the full boilerplate from the filing:

Our current and future competitors may have higher brand recognition, more established relationships with music and other content licensors and mobile device manufacturers, greater financial, technical, and other resources, more sophisticated technologies, and/or more experience in the markets in which we compete.

In addition, Apple and Google also own application store platforms and are charging in-application purchase fees, which are not being levied on their own applications, thus creating a competitive advantage for themselves against us. As the market for on-demand music on the internet and mobile and connected devices increases, new competitors, business models, and solutions are likely to emerge.

As owners of the platforms themselves, Apple and Google will always be able to dictate the terms. And while Spotify is a massive service, its success still hinges on users listening on their mobile devices. It may be able to build a strong brand and create some inertia against potential changes from Apple that could incite user backlash, but at the end of the day, Apple runs the system where its users actually get the service.

As Apple begins diversifying its revenue streams to create a services branch that the company likes to say will be the size of a Fortune 100 company, music is increasingly becoming a core part of that. Google, too, owns its app store platforms, and will recognize 100% of the revenue from its own service. We haven’t seen the full potential of these companies’ approaches to the music space, in particular with Apple Music which appears to be steadily growing, but Spotify is clearly recognizing it as an existential threat.

Spotify has filed to go public

Music streaming service Spotify is going public and it just unveiled its filing.

The documents state that it is targeting a $1 billion IPO, but this is just a placeholder. The company actually plans to go public without the standard fundraising event. In other words, Spotify isn’t selling its shares on the stock market. Instead, the event known as a “direct listing” will be a series of transactions from existing shareholders (like employees and investors) selling shares to stock market investors. Spotify’s filing even acknowledges that this unusual process is “risky.”

Its public debut is likely to happen in late March or early April, but it is unclear how much shares will cost when it lists under “SPOT” on the New York Stock Exchange. Spotify says that for 2018 its shares have traded on the private markets for between $90 and $132.50, valuing the company at $23.4 billion at the top of the range. But that these transactions “may have little or no relation to the opening public price of our ordinary shares on the NYSE.”

Spotify says it is present in 61 countries and its platform includes 159 million monthly active users and 71 million premium subscribers.

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The filing shows that the Swedish company had 4.09 billion Euros in revenue last year (or close to $5 billion), compared to 2.95 billion Euros (about $3.6 billion) the year before. 2015 saw 1.94 billion Euros in revenue (about $2.37 billion).

Losses for last year were 1.2 billion Euros ($1.46 billion), which compares to 539 million Euros ($657 million) the year before.

Spotify previously raised about $2.7 billion in both debt and equity. Accel, Kleiner Perkins and Founders Fund are amongst the Valley VCs that invested. Goldman Sachs and Fidelity also own part of Spotify.

The filing shows that CEO and co-founder Daniel Ek has voting power that represents 23.8% of the company. However, some of this voting power is on behalf of shares owned by Tiger, TME Hong Kong and Image Frame. Ek technically owns closer to 9% of the business.

The prospectus has an additional note about Ek’s compensation, which says that he doesn’t receive a base salary, but is eligible for $1 million annual bonuses based on metrics like subscriber growth and active users.

Martin Lorentzon, who co-founded the business, owns 12.4%. Other large shareholders include Tencent, Tiger Global, Sony Music and Technology Crossover Ventures (TCV).

There are some key obstacles to the business, which Spotify acknowledges in its risk factors.

In it, Spotify explains how it will have to stay ahead of competitors and satisfy rights holders. The first risk mentioned is that  “some of our competitors, including Apple, Amazon, and Google, have developed, and are continuing to develop, devices for which their music streaming service is preloaded.” Since Spotify currently doesn’t make its own phones or smart speakers, its competitors have an advantage in growing subscriber counts. This could ultimately encourage Spotify to build its own smart speaker or headphone hardware in the future.

Some are concerned that Spotify is beholden to music rights owners like record labels who could try to raise rates during periodic re-negotiations if they think the service becomes too profitable. There are also administrative agencies like the Copyright Royalty Board and trade groups like the American Society of Composers, Authors and Publishers who could seek to increase the rates Spotify has to pay. Control of rights is heavily concentrated within a few major labels and organizations. Universal Music Group, Sony Music Entertainment, Warner Music Group, and Merlin hold rights for music that accounted for 87% of Spotify’s streams in 2017. They could potentially wreck Spotify’s margins by demanding higher rates or deprive it of content in ways that would drive away listeners.

Spotify’s costs could continue to increase as it pays for content, creates its own, builds new features, and markets the service in the face of competition. Spotify’s licensing and royalty agreements are complex and could lead to litigation costs if it doesn’t hit milestones or guaranteed minimum payouts, or doesn’t properly license all the content it streams. Spotify has already been hit with numerous lawsuits for failing to find and pay all rights holders. Its competitors also hold larger patent portfolios that they could use to attack Spotify for intellectual property infringement. 

Spotify faces competition from all sides and formats. There are traditional formats like CDs and Vinyl, digital files like MP3s and iTunes downloads, terrestrial and satellite radio, online radio like Pandora, and competing on-demand subscription services including Amazon Prime, Apple Music, Deezer, Google Play Music / YouTube, Joox, and SoundCloud. Since Google and Apple own the top mobile app stores, they could potentially bury Spotify and already charge it a tax that doesn’t get applied to their music services. Interestingly, Spotify lists Facebook as a potential competitor, given that it’s building a smart speaker and has struck deals with record labels, although it offers no music streaming service currently.

The company writes that  “a key differentiating factor between Spotify and other music content providers is our ability to predict music that our Users will enjoy.” Features like Discover Weekly are what keep hardcore listeners on its service, and it will have to find a way to stay ahead of the recommendation engines of its competitors if it wants to win. 

Check out all of TechCrunch’s stories about Spotify going public, and read our feature piece “Going public pits Spotify’s suggestions versus everyone.”

 

Read the Spotify direct listing filing here

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