Spotify. Who, Where, What?

As mentioned earlier, Spotify is the world’s largest music streaming service. It operates on a ‘freemium’ service, where basic services of the company are offered to all users, although are subject to some restrictions, while customers can pay to get access to a premium service without adverts and with perks such as mobile and offline listening. Boasting over 160 million users, nearly half of which are paying customers with a subscription service, it pales in size only to Soundcloud, which boasts far fewer paying customers on a more juvenile app.

The Swedish company was spawned out of the idea that piracy was endangering the world of peer-to-peer music services, with founder Daniel Ek realising that the problem could only be solved by offering a better alternative. The company pays royalties to artists, its primary cost, to access the rights to the world’s most popular artists’ songs. The IPO will take place on Tuesday 3 April with Spotify shares trading under the ticker SPOT.

The company will release a full projection of its first-year finances on Monday 26 March, another unusual move for a company about to IPO as this sensitive information is usually withheld for institutional investors who would be the first entity to be offered the shares. It also took the ground-breaking decision to live-stream its investor day instead of hosting a private affair behind closed doors. It is hoped this transparency will increase the interest in the company from potential investors, also providing an indication of how the company wants to do business.

Perhaps most importantly for potential investors, however, is that the company is yet to turn a profit. It hopes that by listing publicly, drawing on ordinary investors and their hopes for the company’s growth, that it will soon be able to turn this around. It’s worth noting that it is not the only company yet to turn a profit to have listed.

Most recently, Snap floated despite being younger than Spotify and reporting a loss in its pre-IPO listing, while Dropbox, listing on the Nasdaq on 23 March, is also yet to turn a profit. Other companies with pre-IPO difficulties include Facebook, which had almost no mobile advertising revenues but now generates most of its money from these ads, and JD.com, the Chinese e-commerce company that made its first profit three years after its IPO.

It is targeting gross margins of 30-35%, a 10-15% improvement on the previous year and very ambitious given that the service pays royalties to artists. This would put it in line with other tech companies such as Netflix.

The music streaming market

While Spotify may be the number one music streaming service in the world, it is not without stiff competition from other start-ups, as well as some of the world’s largest tech companies attempting to enter the affray.

 Both Amazon and Apple offer music streaming services, however the two largest companies in the world both boast much smaller userbases than Spotify’s, despite their global reach.  Apple Music is the closest to Spotify in terms on users, with 40m, while Amazon Music claims just 16m, although both only offer paid subscriptions. Other start-up companies, such as rapper Jay-Z’s Tidal and US company Pandora, also offer rivalries to Spotify.

As mentioned above, music streaming services rely on paying royalties to artists on a per-stream basis. However, the value of these royalties is based on licensing negotiations, which are normally handled by record labels.

Over the page, we analyse why Spotify’s IPO is unusual, as well as asking if this creates a new blueprint for IPOs.