Analysis

Nobody should be surprised that Spotify is already planning its IPO


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spotify

Watch stories about Spotify planning a stock market flotation this Autumn spread across the web in the coming hours, triggered by a report on tech/business site Quartz.

“The popular music-streaming company has participated in informal chats with some of the investment banks likely to fight for a role in a potential IPO, sources familiar with the process said,” claims the article.

“The six-year-old service may start holding formal meetings as early as next month in anticipation of an offering in autumn. (Though the timeline for a possible IPO could change for a number of reasons, including unfavorable market conditions.)”

The key words here being “informal”, “potential”, “may”, “could change for a number of reasons”. Those are sensible caveats, but they’re not matched by the firmer headline – ‘Spotify is planning an IPO for this fall’.

A more measured reaction: of course it is exploring the possibility, as any technology firm with $538m of funding behind it and a multi-billion dollar valuation would be in 2014.

Bear in mind that Spotify’s last funding round – all $250m of it – came from Technology Crossover Ventures, which specialises in late-stage investments: it backed Netflix and Facebook before they went public.

If Spotify wasn’t having “informal chats” with investment banks at this stage in its history, its investors would have some searching questions for CEO Daniel Ek and his management team. This’ll be a real news story when those conversations turn formal.

Spotify’s last set of financials, for 2012, revealed annual revenues of $577.1m and a net loss of $77.9m. The company claims to have paid out $1bn to music rightsholders since its launch in 2008, with $500m of those payouts coming in 2013. Spotify says it pays out around 70% of its revenues as royalties, which would suggest that in 2013, its revenues were around $715m.

Spotify may not be profitable, but streaming music is an increasingly valuable market. In 2013, streaming services generated $1.1bn of income for the music industry, and 27% of overall digital revenues, with 28m people around the world paying for a streaming subscription.

Officially, Spotify has 6m paying subscribers out of 24m active users. Those numbers haven’t been updated since March 2013 though: label sources suggest that the company will soon hit 10m paying users globally. All of this points towards an exit of some kind – likely an IPO unless a tech giant decides to swoop in beforehand.

Spotify’s last funding round in November 2013 valued the company at $4bn, which in a world where Facebook pays $19bn for messaging app WhatsApp and $2bn for fledgling virtual reality startup Oculus Rift, means Spotify remains well within acquisition range for the biggest beasts of the technology world. Talk of IPO timescales may well flush any late-stage suitors out…

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