Spotify, a company founded in 2008 in Sweden, offers the most important streaming music service in the world: it is present in 65 countries and has 157 million users, 70 million of whom subscribed to the paid version. It allows you to listen to 35 million songs, divided into at least two billion playlists. April 3 will be the most important moment in its history: the listing on the New York Stock Exchange, which will give value to the company and will tell how much confidence investors have for its future. As Lucas Shaw wrote on Bloomberg, “Investors will decide whether it matters that the world's leading music streaming service earns nothing.”
As we have seen in the documents that Spotify has recently sent to the SEC, Consob's American consideration, the company has been operating at a loss for some years, for the simple fact that as its users increase, its main item of expenditure also increases: copyright to the authors of the songs listened to. Shaw pointed out that Spotify “saved the music” – because it makes record companies money by charging users who would otherwise listen to music illegally – but now has to worry about “saving itself” by finding a business model that works.
Spotify was founded in 2008 by Martin Lorentzon and Daniel Ek, who is its current CEO. Ek is 35 years old and before becoming Spotify's CEO he worked for eBay, an online advertising company, and the company that ran the video game Stardoll. He said he thought of a streaming music company when he closed Napster in 2002 and opened Kazaa, a service that had a different name but did the same thing. He said he thought the only way to beat illegal streaming was to offer a better service. Ek said that the name Spotify was born by chance after he misunderstood another name (it is not known which one) pronounced by Lorentzon. His company now has more paying users than all of its competitors combined: its main rival, Apple Music, has 38 million subscribers.
A few days ago, in a letter addressed to potential future buyers of Spotify's shares, Ek wrote that the company wants to make record companies obsolete and directly connect musicians and users, so that “artists can produce and publish their music themselves, without the obstacles of the old model “.
It is difficult to say what this “new model” actually consists of, if any. In 2016, Spotify had a combined revenue of around three billion euros and at the moment almost all of the money Spotify earns comes from users who pay for the subscription. Spotify, however, has spent more than two billion to pay royalties to artists and record companies. All other costs must be added to these expenses: the salary of 3,500 employees, communication, server management and all other costs of any normal company. In summary: Spotify has been spending more than it collects for years.
In 2014 it had an operating loss of approximately 200 million euros; in 2016 it was about half a billion. All this, despite its users having increased by 800 percent from 2011 to 2016. Shaw explains: “It's hard to make a profit when copyright owners get 75 cents of every dollar that comes in.”
“The value of a company is the sum of all problems solved “- ML… So, problems to me aren't just bad, they are necessary to create value.
– Daniel Ek (@eldsjal) March 20, 2018
There are those who even think that Spotify risks ending up with other music services that seemed to have a promising future and then disappeared or never really became protagonists, as Spotify has so far managed to be: Pandora, Deezer, Grooveshark, MOG , Songza or Rdio. The first problem in the music field is that there are three record companies – Sony, Universal and Warner – that control a large part of the market: on Spotify, nine out of ten songs are from these three record companies. It seems that Spotify has managed, with difficulty, to convince Sony, Universal and Warner to work together for their own good: but this compromise has had considerable costs.
The second problem is that its main rival, Apple, has a lot more money and uses music only as a means of convincing its users to buy its products. Apple can afford to lose money on contracts with Sony, Universal and Warner as long as it sells more iPhones, because that's where it makes its money. Spotify must therefore be able to defeat Apple, which is a much larger company willing to operate at a loss, without being able to compete as equals.
The solution, according to many, is that Spotify aims to become for audio what Netflix is for video: not surprisingly, before going public, Ek hired Barry McCarthy, who worked at Netflix as CFO (head of the financial) when the company went public. However, there is a big difference between the two companies: Netflix spends a lot of money to buy or, increasingly, produce content, and only later asks users for money (and can reinvest that money as it wants). Spotify, on the other hand, produces nothing, and when it asks users for money and has to pass a large part of it to the real owners of the content: the margin to invest and improve the service is not much.
Spotify, however, has several other ways to earn money: it could start selling the important information it collects about users' musical tastes; he could ask for percentages on the tickets that users buy after listening to some singers on his platform; it could – and has already started – organize events, festivals, tours and concerts, perhaps based on its hugely popular playlists; on those created and edited directly by Spotify, 30 percent of the music listened to on the platform is heard, and some are followed by millions of users and are decisive in the success of a singer. He has also started to take an interest in podcasts (an industry where there are no record companies) and to get money from singers who want to promote their songs in the most popular playlists.
Among other things, the company has chosen to go public with a rare mechanism, which allows faster times and fewer restrictions for the quotation but which involves greater risks for the company that decides to go public. The company will offer its shares directly, not with an IPO (initial public offering). It means, simplifying a bit, that Spotify will not put new shares on the market but will allow current investors to sell their shares. In all, 31 percent of Spotify's shares will be available. It seems he made this choice because he doesn't need money in the short term (he loses some, but that's okay for now), but long-term investor confidence.
