Cash-Strapped Spotify Is Desperately Seeking a $500 Million Loan

Spotify: How Long Can the Cashburn Last?

Apple has billions to blow on a streaming music service.  Is Spotify already running out of cash?

According to a report first surfacing in Sweden’s SvD Näringsliv, Spotify is now trying to raise $500 million in convertible debt financing, i.e., loans, with creditors given the option to convert their loans into equity.  That follows more than $1 billion in previous financing, with a total company valuation north of $8 billion.

The move comes alongside heavy growth for Spotify, with whisper numbers pointing to a user base of more than 100 million.  Several months ago, the company reported 20 million paying subscribers, a figure now estimated to be north of 25 million (and perhaps as high as 30).  That is still more than double that of Apple Music, which most recently reported 10 million paying subscribers.

The only problem is that Apple Music has only been in the market for 7 months, while Spotify has been in existence for more than 7 years.

The debt offering raises serious questions about the future of Spotify, especially in the absence of a scheduled Wall Street IPO.  The heavily-hyped Spotify has been rumored for years to be preparing an initial market offering, though the latest industry chatter points to more delays ahead.  A major roadblock is coming from major labels Universal Music Group, Warner Music Group, and Sony Music Entertainment, a group that has reportedly structured short-term, one-year licensing arrangements while pushing for major shifts in how access tiers are structured.

The biggest among those demands revolves around ‘freemium,’ or Spotify’s mix of paid and ad-supported.  Spotify has long argued that ad-supported, free access is a necessary starting point for getting users to pay.  At the same time, Spotify has refused to put limits on free access periods, leaving a giant mass of free-loaders that will tolerate ads.

 

Apple, on the other hand, places a strict, three-month free-access window, while requiring a credit card upfront.  That’s a totally different approach, and one that has resulted in substantially stronger subscriber ratios (ie, paid people vs. free people).  And, more money: labels are now reportedly getting juicier royalty checks from Apple, and a lot more encouragement to crush limitless freemium.

12 Responses

  1. Remi Swierczek

    CONVERTION of Spotify, Google, Amazon, Apple, Deezer or Pandora NERRRRDS to subscription and ads FREE discovery moment monetization music stores is primitive and long time OVERDUE.

    Digital medieval has to STOP!

    Just note that we could have driven cars and used computers in AD500 if it would be for 1500 year long stupidity and blindness of the rulers of the human civilization!

    Reply
  2. Well, Gotta Pay For Those Lawsuits Somehow...

    Hello Investors,

    We need $150-$200 million to settle lawsuits because we didn’t want to pay $75 per song to obtain legal licenses. Better to beg forgiveness than ask for permission ya know.

    Please, make your check payable to SPOTIFY, BURNING YOUR MONEY LLC

    Thank You

    Reply
  3. Mike C.

    Paul, do you really think Spotify is running out of cash? Raising debt financing does not necessarily mean the company is in trouble. It could mean simply they are taking advantage of low interest rates and market conditions, building a war chest of cash to prepare for the long slog competition with Apple and others.

    If we were conservative and assumed 20 million paying subscribers, say $100 per subscriber annually, this means $2B annual revenue. After a $1.4B royalty cost, this leaves $600M to spend on engineers and marketing. Sounds like a lot of money to spend on software engineers and marketing, no?. What could they be blowing their money on after $600M that would cause them to be in the red?

    Reply
    • GGG

      While I DO agree with your first paragraph and Paul is probably over-inflating the “trouble” Spotify is in, since Google, et al have operated this way for decades, modern tech startups/companies can definitely blow through a huge chunk of $600M easy. You’ve got to entice highly skilled programmers to work for you, so you spend way too much money on pimped out offices, as Spotify has done all over the world, and you’ve got some overpaid employees who probably also got hefty signing bonuses. Not to mention they employ a ton of people, so normal operating costs will add up, as well.

      Reply
      • Mike C.

        hi, ggg –

        sure i get that startups can burn thru cash pretty quickly….but c’mon, $600M on some “pimped out” offices? That’s a lot of Odwalla. Of the high profile tech flameouts, I don’t think we’ve ever seen a company blow thru that kind of money. The tech companies that go bankrupt are usually ones with little to no revenue. Spotify does not belong in that class. I just don’t see these poor fundamentals that Paul is referring to, and keep in mind, they are still private and aren’t obligated to disclose a whole lot to the general public. And even if they did disclose detailed financial documents, it’s doubtful we in the music industry could actually understand those documents. lol

        If Spotify is actually running at a loss or break-even, it probably has to do with non-fixed costs like marketing, which are costs could peel back if things got really dicey. They aren’t going anywhere.

        Reply
        • Paul Resnikoff
          Paul Resnikoff

          Mike C., I feel I have to disabuse you of this extreme disinformation.

          I just don’t see these poor fundamentals that Paul is referring to, and keep in mind, they are still private and aren’t obligated to disclose a whole lot to the general public.

          This is incorrect. There are regular financial filings both in Luxembourg and London based on regulatory requirements in both of those regions (EU, and UK).

          The latest filing in the UK (which has a considerable time lag) shows that, despite endless rhetoric about profitability, the company is losing money.

          Here are the details on that:

          Oct 14 2015, Digital Music News: Spotify UK Is No Longer a Profitable Business

          Even worse are the broader filings in Europe.

          May 8 2015, Digital Music News: Don’t Worry, Spotify Only Lost $181.5 Million Last Year…

          These aren’t solely marketing costs; what is really putting Spotify into dire financial straits are massive and recurring content costs, which are extremely expensive and variable. This is why Wall Street is extremely skeptical about this company.

          Reply
          • Mike C.

            Hi Paul,

            Thanks for the reply. Yes, I’m familiar with your previous posts on the doomsday scenarios with Spotify, indeed, we all are ; ) For one, just by glancing at your snapshots of their financial docs I can see they really aren’t all that detailed, and 2, we’ve already accounted for the content costs. I’m more curious about the free cash flow after content costs. There’s very little in your snapshots that show how they are blowing through that cash. Admittedly, even if you had that detailed information, I probably wouldn’t go through it.

            I’m no banker, but it seems to me if Wall St. were so skeptical of Spotify’s future, it would follow that Spotify would have a harder time raising another $500M in debt financing. They aren’t selling junk bonds at loan-shark interest rates, it’s your basic, boring convertible debt. Nobody is pushing any panic buttons. Even Apple raises debt financing while sitting on a literal mountain of cash, for tax purposes. And, as you’ve pointed out, Wall St. has awarded Spotify with an $8B valuation. Not exactly a valuation for a “desperate” company.

            I’m not familiar with all the rhetoric about profitability in streaming. Has their been any? i was under the impression most people believe streaming will some day become a cash cow, but for right now it’s still too early, and all available excess cash is going towards converting the average music pirate or freeloader into a paid music subscriber.

            Lastly, and I could be wrong on this, but doesn’t Spotify cap content costs at 70% of revenue? That would mean content costs are fixed, not variable, and could therefore be planned for and budgeted. As the top line grows, all these “losses” will simply melt away.

            Looking forward to seeing how it all plays out, as Im sure you are as well. I do appreciate your reporting on this, and although I disagree with your basic premise, please keep them coming.

            Mike

    • Tim F.

      “Sounds like a lot of money to spend on software engineers and marketing, no?”

      No, it does not. And there are innumerable other costs too.

      Reply
  4. Christian B

    Paul,

    Why do you have such a personal vendetta against Spotify? You don’t have any evidence that the company is “cash strapped” or “desperate” unless you aren’t sharing it. One of the articles out there two days ago when the news hit said they are approaching 30 m paid subscribers with a probable launch in Japan shortly. With that information you could have just as easily written something objective or dare I say, positive. You have a steady stream (sorry) of hatred for them on this blog of yours and it begs the question, what did they do to you to make you so irritated? Unless you are using the headline for click bait in which case you are exactly who you profess to dislike in the media/ entertainment world.

    Reply
    • Paul Resnikoff
      Paul Resnikoff

      Please don’t shoot the messenger, Christian. Just do a little research and you’ll realize this is not a financially-sound company, the fundamentals are very poor. If you’ve read serious analyst coverage of this company, or simply read filed financial statements, you’ll see I’m just making obvious observations. I’m just one of the only journalists saying it out loud.

      Reply

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