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Spotify files for its DPO: so what do you need to know?


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“Feels great to have the cat out of the bag. Transparency breeds trust,” tweeted Spotify CEO Daniel Ek last night. The cat in this instance being Spotify’s long-awaited filing for its direct public offering (DPO), which was published last night.

The document offers the most detailed insight yet into Spotify’s current business and future prospects. We’ve been filleting the filing for the key data and a few surprises.

– Spotify ended 2017 with 159 monthly active users, including 71 million premium subscribers, up 29% and 46% respectively year-on-year. On average, each active user streams 25 ‘content hours’ (music and video) a month – just under 4bn total hours a month, and 40.3bn for 2017 as a whole. “Historically, our premium subscribers have streamed more than three times the amount of content per month than ad-supported Users,” noted Spotify.

– Spotify’s revenues grew strongly from €2.95bn in 2016 to €4.09bn in 2017. However, its net losses soared too: from €539m in 2016 to €1.24bn in 2017. Spotify’s operating loss saw smaller growth though: €349m in 2016 to €378m in 2017. The company has now paid out more than €8bn to music rightsholders since its launch. Its premium subscriptions accounted for just under 90% of its revenues last year.

– Spotify claims that in 2017, it had a global streaming market share of 42% based on revenues. That includes a 41% share in the US, 42% in Brazil and 59% in the UK (its three largest countries by monthly active users – note Brazil there) and 95% in its homeland, Sweden.

– Talking of geographical splits: Europe accounts for 37% of Spotify’s active users – 58 million listeners at the end of 2017. North America accounts for 32% (around 51 million); Latin America for 21% (33 million); and the rest of the world for 10% (16 million). All these regions are growing though: up 26%, 23%, 37% and 51% respectively in 2017.

– Spotify’s new licensing deals are already having an impact. In 2017, its ‘premium cost of revenue’ (i.e. royalties for streams by subscribers) accounted for 78% of its subscription revenues, down from 84% in 2016. Its ad-supported cost of revenue also fell as a percentage of advertising revenues: from 112% (!) in 2016 to 90% in 2017.

– One new metric to talk about: ‘Premium Churn’ which is the percentage of subscribers who cancel their subscription. It’s trended downwards in recent years: from 7.5% in Q4 2015, to 6% in Q4 2016, and 5.1% in Q4 2017.

– Another metric: ‘Premium ARPU’: the average money Spotify makes a month from each premium subscriber. It’s been falling: from €6.84 in 2015 to €6.20 in 2016 and €5.32 in 2017. Spotify’s family plan is part of that – each registered user on a family plan counts as a single subscriber – as is its expansion into some emerging markets.

– Spotify’s curated and algorithmic playlists now generate around 31% of all listening on the service, up from less than 20% two years ago. The company makes its case for this as a fanbase-building mechanism for artists, noting that when it picked up on AWAL-signed Lauv’s ‘The Other’ track in early 2017, around 70% of its peak 750k daily streams came from programmed playlists.

– Spotify is still making its case for its free tier as a funnel to its premium subscriptions: More than 60% of subscribers added since February 2014 started on the free tier. And there are some figures for Spotify’s bi-annual ‘trial’ campaigns which offer a free (or $0.99-for-three-months) taste of its premium tier. These trials accounted for 27%, 23% and 20% of added premium subscribers in 2015, 2016 and 2017 respectively.

– In the last three years, Spotify spent €739m on research and development, with a 91% increase in 2017. The company also spent €1.15bn on sales and marketing over that period. The filing also outlines Spotify’s rapid headcount increase, from an average of 2,084 full-time employees in 2016 to 2,960 in 2017 – a year in which it paid €348m in wages and salaries.

– Could emerging markets be Spotify’s next big publishing headache – but indeed, one for every streaming service? “In Asia and Latin America, we are seeing a trend of movement away from blanket licenses from copyright collectives, which is leading to a fragmented copyright licensing landscape,” noted Spotify’s filing, referring to publishers and songwriters choosing not to be represented by collecting societies.

– Spotify isn’t blind to the potential for Facebook to ultimately be a rival rather than a partner. “If known incumbents in the digital media space such as Facebook choose to offer competing services, they may devote greater resources than we have available, have a more accelerated time frame for deployment, and leverage their existing user base and proprietary technologies to provide services that our users and advertisers may view as superior,” it suggests, admittedly in the risks section of the filing which would be expected to cast its net wide and pessimistically.

Other journalists have been pulling out separate aspects from the DPO filing, including how its direct listing will work; the mechanisms through which founders Ek and Martin Lorentzon will retain control; and the role played in the run-up to the DPO by Spotify’s convertible-debt shareholders.

There’s even an insight into Tencent Music’s valuation based on its share-swap with Spotify ($12bn, since you ask). Investors will be poring over all this in the run-up to Spotify listing as SPOT on the New York Stock Exchange, likely later this month.

Stuart Dredge

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