Spotify Lists on the New York Stock Exchange: How Will They Do?

Source: Reuters

Spotify began listing on the New York Stock Exchange in an unconventional public offering.  The company did not issue new shares, it simply made 90% of outstanding shares available to sell.  Buyers were matched with sellers similar to a huge public auction.  Other than an Exchange screwup with the wrong flag being raised (a Swiss flag was raised, not a Swedish flag!), it appears the first day of official trading was solid considering the fall and volatility the market has seen over the past few weeks.  But, how does Spotify do going forward?

The Spotify stats:

  • Founded in Sweden in 2008, over 3,500 employees
  • Service is available in 65 markets
  • Over 156m active subscribers
  • 36m songs and over 2b playlists
  • Spotify has by far the largest base of paying music subscribers:
    • Spotify 72m
    • Apple Music 38m
    • Pandora 5.5m
    • Amazon has not publically stated its size, but is rumored to be in the #3 position and growing quickly

 

First, where is music streaming space heading? 

To differentiate, streaming services will compete similarly to paid TV services.  This is, who can attract new subscribers via unique content such as concerts, podcasts, interviews, and new AI experiences.  This is where it will be most difficult for Spotify to lead.  Apple, Amazon or Alphabet are not relying on music to turn a profit.  The trio is happy to make money but just as energetic about creating stickiness for their ecosystems.  If the space turns into a spending game of unique content, these big players will win.

 

The positives for Spotify:

There are some positives going for the company.  Other than being the leader in streaming music customer base and with the expectation of 33% growth over the next 18 months, the company has been known for creative ways attempting to work directly with artists.  Spotify is known to be the most artist-friendly of music services.  The company attempts to differentiate by working to promote artists and providing an easy platform for subs to purchase concert tickets, for example.  The company has also launched ‘Spotify for Artists’, which gives artists data on who is listening to their music—demographics and geographic footprint.

The company boasts that because of its size, Spotify has also been able to negotiate more favorable contracts with the large record labels.  Spotify is also known as a leader in user experience via AI.  This is, better algorithms to suggest music which will be liked by subscribers—the company hints more is en route.

Spotify works seamlessly across platforms and has a strong global presence.  This contrasts with its competitors.  Apple has a strong following across its hardware base, but the company is limited across Android devices.  Amazon is very strong within the US, but weak in many regions.

The negatives for Spotify:

The streaming music business is tough to turn a profit as royalty payments are so high.  Pandora, which went public in 2011, has not yet turned a profit.  What makes it so tough is royalty payments skim 70%-75% of revenues.  In addition, companies make only small amounts of money on ‘free’ ad-based subscribers—Spotify to the tune of only 10% of its total revenues come from ads.  Therefore, to turn to profitability, the company must convert ad-based ‘free’ subscribers to monthly paying subs.

Spotify has toyed with the idea but does not make its own music hardware.  Apple, Google, and Amazon have increasingly popular AI assistants.  It is simple for users to receive music within the ecosystem of the AI assistant of their choice.  In addition, Spotify must pay Apple and Google a small cut due to Spotify’s in-app payments within iOS and Android.

Conclusion:

Spotify is off to a promising start during its honeymoon IPO period.  The key will be the next 18 months–will the company be able to convert non-paying subs into paying subs.  The company may shake things up with leading AI or unique competitions with record labels.  However, it will be a difficult road ahead to lead in the streaming music space with Apple, Alphabet and Amazon all competing in the same arena with much deeper pockets.