Spotify had an IPO yesterday which according to our sources was a success and a lukewarm forecast for the future of music streaming. Spotify’s shares closed at $149.6 which is 12% higher than its initial reference of $132 yet below a high of $165.9. This gave it a market valuation of about $26.6 billion. Spofity’s shares dwindled from the opening high because its business model lacked brilliance, a representation of future economics of the music industry.
Spotify’s unique IPO approach is called direct listing and it implies sale of shares directly to the public without an intermediary. Co-founder and CEO of the company, Daniel Ek said in a blog that, “Spotify is not raising capital, and our shareholders and employees have been free to buy and sell our stock for years. So while tomorrow puts us on a bigger stage, it doesn’t change who we are, what we are about, or how we operate.” Spotify happens to be the biggest company to ever go public through direct listing and the first on the NYSE.
Although, CEO Daniel Ek says that the company isn’t raising capital with its IPO, it is beyond doubt in need of cash. The company earns $5 billion in annual revenue, but, it pays more than ¾ of that in royalties to labels, producers, songwriters, and artists. The Big Three which include the Universal Music Group, Sony Music Entertainment, and Warner Music Group control most of that ecosystem leaving only a little amount of revenue and zero profit for Spotify to recover from its 70 million paying subscribers. There are about 90 million free listeners, however, Spotify only makes about 10% of its total yearly revenue from ads to those free users.
This puts Spotify on a lot of pressure to ensure that it can continue to grow while Apple Music closes the subscriber gap. Though Spotify is cutting its losses as a result of renegotiated deals with record labels, it still loses about $1.5 billion per annum.
There is hardly any hope for Spotify to survive if it does not figure out a way to make more revenue.