If Facebook is flopping on Wall Street, what does that mean for the vast ecosystem of Facebook-dependent models? Like Spotify, which is about to get puffed into the stratosphere by Goldman Sachs? The reported $220 million Spotify round would feature a $100 million injection from Goldman, according to the New York Times, and a huge part of that investment is predicated upon plum Facebook integration.
In fact, it’s a major ingredient in a Spotify shell game that features monstrous Wall Street expectations, and gargantuan profits for a small group of Spotify, major label, VC, and Goldman stakeholders. It bears similarity to other social-oriented startups, which would be reduced to scraps without a tightly-wound Facebook tie-in. But what if Facebook fails to perform – on Wall Street or elsewhere – and becomes a victim of its own insane hype? You can blame Facebook’s lukewarm reception on the Nasdaq glitch, which cancelled some high-flying bids and killed early momentum. Or, you can look at more fundamental valuation and hype problems, including a stratospheric earnings multiple that dwarfs established tech players like Google and Apple. Facebook may be worth $100 billion someday, just not right now. And there’s just as much reason to argue against that ultimate reality, especially given the rough history of social networking startups and ad-based plays. None of this is good for Spotify. Peel the Facebook layer back, and there’s a bleak story for music startups. Pandora (P) is the publicly-traded poster child we know well: it has 150 million-plus registered users and a model that amazingly worked, but that means little to tough traders. It just isn’t profitable, and even if Pandora becomes profitable, it becomes hard to reasonably scale with variable-and-increasing royalty costs. Unfortunately, these same questions are likely to dog Spotify, especially at a valuation of $4 billion (or more).