Spotify’s Wall Street Window May Have ‘Disappeared’….

Pandora IPO (2011)
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Pandora made billions on Wall Street, so why can’t Spotify?

Part of the reason is that it’s 2014, not 2011.  And according to Fred Wilson, one of the most successful tech investors in the world, the window for billion-dollar, profitless IPOs may have disappeared entirely.   Simply put, cash-burning startups with little hope of profitability are no longer interesting to more scrutinizing traders.

This is all part of the ‘valuation trap,’ which refers to the narrowing exit opportunities that high-flying, outrageously-funded companies can entertain.  Wilson quotes TechCrunch author Danny Chrichton, who points out that super-funded companies like Spotify have only two happy endings: (a) a huge IPO, or (b) a huge acquisition.  And in the absence of any profits in the foreseeable future, those are increasingly unlikely outcomes.

“The combination of sky high valuations, equally high burn rates, and a disappearing IPO market is not a pleasant one.”

The Wall Street card is suddenly getting tricky: Wilson pointed to a pair of notoriously profitless, cash-burning companies – Box and Square – both of whom have now delayed their planned initial public offerings (IPOs).  “The past three months have not been good for high-flying tech stocks and now we are seeing IPOs being postponed,” Wilson noted.  “Both Square and Box have recently done that.”

“So the moral of this story is that you can push valuations when you have investors knocking down your door, but unless you are cash flow positive and expect to remain so for the foreseeable future, you do that at your own risk,” Wilson continues.

“You will need to find someone to top that price down the road and that person may not be there.”

Wilson’s extremely-successful investment portfolio at Union Square Ventures includes Twitter, Tumblr, Kickstarter, Zynga, and Foursquare.

28 Responses

  1. Anon

    i’ve said this before, the only parties making money on these ventures are the record labels and the founders of the streaming companies. the artists and the investors are getting hosed. the artists have no choice, but the investors are walking blindly into a money pit that has no sign of profitability in the near future. revenue does not always equal profitability. i’m surprised it took this long for wall street to figure this out.

    • FarePlay

      Interesting that Techcrunch would weigh in on this. Although, it would be beneficial for YouTube.

      Tragically, Spotify opened the door for nearly unlimited, legal, free access to music. I wonder how the major label equity partners are reacting to the news.

    • visitor

      does anyone remember 1999-2000 and the dotbomb bubble 1.0… history repeats itself… of course the majority of youngsters in the new tech bubble and bomb to be were probably only in diapers the last time around.

      let us not forget that was the highest IPO in history at it’s time. let us not forget that circa 2004 any conversation about the “future” of the music business could not be had without your “myspace” strategy.


  2. Anonymous

    :) Streaming is a museum :) No good music on Spotify or Pandora :) Fuck Streaming :)

    • GGG

      I hope this is someone making fun of the Anonymous that always says this dumb shit, and not actually that Anonymous saying that dumb shit again…

      • PiratesWinLOL

        The problem is that his perceptions and opinions is often based on his dreams and what he wants reality to be. Not on what is actually is.

    • PiratesWinLOL

      Museum? And no good music? Well, what is good music to you then and what is missing? With regard to your museum comment, everything from for example the current US top 20 seems to be there, so for the majority it is nothing like a museum obviously.

      • Anonymous

        Where is Beyonce? :) Beyonce shows, that there is a trend. :) A trend towards the death of streaming. :) Better keep your CD player a little longer. :) Fuck Streaming. :)

  3. Paul Resnikoff

    Does streaming music survive?

    Trends in technology are extremely hard to predict, but the momentum is clearly with streaming media delivery. A giant class of music fans only stream at this point. The only problem is that this revolution in consumption is largely being paid for by people other than the consumer: investors, giant corporations, YouTube, etc.

    So does Spotify survive?

    It’s actually not such a clear bet. After all, they *are* clearly in the ‘valuation trap’. If Spotify had Sirius XM numbers, maybe we’d be having a different projection. Instead they have 10mm paying subscribers (maybe), 6mm on the low end… and prodigious amounts of financing in the hopes of pulling an outrageous, WhatsApp style acquisition (or fraction thereof).

    OR, a Pandora- or Twitter-style IPO. Pick one or the other.

    Extremely risky: it could work, or, it could implode, esp. in the absence of a serious, sustained profitability. Personally, I think the Apples and Googles (ie, YouTubes) of the world control streaming music tomorrow, and I’m not sure there’s a sustainable model that can exist outside one of these motherships.

    Just take a look at music downloads – a post-mature form of music consumption – for an ‘analog’. Downloads historically sold hardware for Apple, and did little for the bottom line.

    Let’s see.

    • Tune Hunter

      Streaming will thrive, this is the only way to go.
      Spotify has nice future as variation of Pandora with money coming for both, not from subscription, but from Discovery Moment Monetization. The pie will grow to $100 billion and there will be room for 5B Pandora and 3B Spotify in ACTUAL SALES.

      Current beating around the bushes with $4.99 avg. sub and advertising around FREE leads to very small 20 to 25 billion industry with many BIG FISH in small pond.

    • DRMHunter

      Mr. Resnikoff. It is clear that you hate Spotify for some reason. You keep letting this shine through in 90% of your articles. We know by now. Please focus on something else.

      • Paul Resnikoff

        I question your God. You call me a hating non-believer. So be it.

    • zog

      Streaming is here to stay in one way or as technology changes in other forms. I wrote a paper at Berklee in 2005 that I believed, the cable providers would control the steaming and down loads of music and video since they had packages and subscription models in place. But with the Aereo case evolving “wifi”and Apple with it’s Itunes accounts I believe in the long run it may be Google and Apple your on the money here.

    • Dumbfounded

      “mm”? 10 millimeters paying subscribers? How can you measure subscribers in millimeters?

    • Faza (TCM)

      Does Spotify survive? It’s hard to predict stuff, especially the future, but we can consider several scenarios.

      There are two plausible ways for the current Spotify team (meaning, the insiders) to come out on top here. The first is to sell – which seems to be the one they’re going for, the second is to become profitable, stick it out and rake in money over the long term. There are two ways for both of these to be achieved, which gives us a total of four options:

      1. Sell the thing
      a. IPO – it’s what they seem to be going for, but it’s possible that they have indeed missed the bus.
      Assessment: unlikely at current valuation
      Reasoning: mostly covered above; to this I would add that if we examine the post-IPO performance of similar companies, both in terms of profitability and valuation, we don’t get a particularly inviting picture. Spotify are late to the party and it’s likely everyone can spot a lead balloon by now.

      b. Takeover – possible, provided Spotify has something that either Google or Facebook might want – meaning: otherwise unobtainable user data.
      Assessment: unlikely at current valuation
      Reasoning: even if Google, say, were considering buying Spotify, they cannot help but notice the fact that – unlike something like Twitter – Spotify are necessarily haemorraging money due to royalty payments. The longer this continues, the more desperate the Spotify management and backers become and the cheaper a possible acquisition becomes.

      2. Becoming profitable:
      a. Cost-cutting – Dr Envelope guesses that Spotify would have brought in over $200 million, after royalty payments, over the course of the previous year. Is it possible to bring down the company’s operating costs to below that amount? Maybe. I know that they already “socialise” the delivery cost by leveraging P2P technology between subscribers, so maybe they could at least break even by trimming the fat?
      Assessment: very unlikely
      Reasoning: in any company, the majority of the fat congregates at the top and the fact that the most effective cost-cutting measures (allowing greatest savings without affecting the operational capacity of the company) would hit the decision makers hardest means that the chances of them being implemented are virtually nil. If anything, we should be hearing more of “we really can’t be having with these onerous royalties” soon. The other reason cuts are unlikely is that they would likely have a negative effect on the valuation (since they would pretty much be an admission that the company is in serious trouble) and quite possibly scuttle any chances of a profitable exit.

      b. Improving revenues – Spotify could do a lot here. David mentions some ideas below, I’ve outlined some myself, elsewhen. By any sensible measure, Spotify’s ARPU is far below what it should be.
      Assessment: very unlikely
      Reasoning: If Spotify wanted to follow this route, they would have done so already. As things stand, they’ve made the classic blunder of getting their customers accustomed to not having to pay. Attempting to increase per-customer revenues would likely result in people leaving Spotify en masse for one of the emerging alternatives, thus defeating the purpose of the exercise and further jeopardising the chances of a profitable exit.

      Unless Spotify manages to pull one of the above tricks off, it will die.

      Mr. Resnikoff. It is clear that you hate Spotify for some reason.

      Erm… that would be me.

    • PiratesWinLOL

      It is a silly question if music streaming will survive. A much better question would be if anything except streaming will survive and for how long. The advantages streaming offers consumers are numerous and substantial and it is clearly what especially young people want. The numbers makes it crystal clear. They don’t want downloads, they don’t want CDs and they do want streaming. Apart form that it is also the only method of delivery, which has delivered proper substantial growth in markets where it is strong, such as Denmark, Sweden and Norway.

      If Spotify will survive is obviously another question. I don’t think the major labels would allow it to actually disappear. They would loose a lot of money, from all those 10 million subs not paying them anymore and perhaps turning to GrooveShark, YouTube or download piracy. It might very well end up being a part of perhaps Facebook or another large company which would be interested in having a strong position in that market.

    • smg77

      Even if you manged to realize your dream of shutting down Spotify today it’s not going to make people want to go back to paying $18 for CDs.

  4. David

    Spotify could be profitable if they took seriously their stated policy to “drive users to our premium subscription tier”. At the moment they don’t do much to achieve this. Limits on free streaming seem to have been abandoned. I think on mobile devices the free option can only be used in ‘shuffle’ mode, but that is not much of a limitation. If they had a general limit of, say, 20 hours a month, with no track to be played more than 5 times a month, there would be a stronger incentive for casual listeners to switch to the paid option. Streaming services generally need to get more imaginative about pricing. For example, I think there is a real gap in the market to meet the needs of people who only want to use a streaming service infrequently (say an hour or two a week on average). At the moment the ‘paid’ options are bad value for such people, but a pricing system that only charged according to the amount of usage might attract them. E.g. you pay a ten dollar deposit which is debited by a suitable amount for every track played, then you renew the deposit when it runs out.

  5. Willis

    Their window was similar to those in cartoons where you open it and brick wall is on the other side.

  6. Fritschie

    The holy grail for content, end users and Madison avenue is right around the corner. I promise.

  7. Steve Sinclair

    Spotify has operating income of $200 million with subs totaling just 10 million. Their margins of 30% and are ironclad and not subject to being diminished. I think they can therefore grow this substantially simply by growing subscription numbers, and if they, do and if their operating costs grow at a slower pace than their subscription growth (and the will because operating costs are a composite of both fixed and variable expenses) then they will turn the corner and become profitable on a cash flow basis. This will happen only if a substantial portion of operating costs are fixed which I believe they must be. Spotify is therefore working its way to profitability and that is terrible news particularly for artists. Labels are still enjoying the legacy artist contracts written before artists became aware of the corrosive effects of streaming on royalty income and before artists became aware of how ineffectual and essentially unnecessary record labels’ marketing, promotion and manufacturing services have become. More artists will opt out of label contracts because a) recording expenses have fallen and they can afford to record themselves, b) manufacturing services are unnecessary with no more cost of inventory, c) digital distribution has become a “one-stop” affair vs the old system of 15,000 record stores, and d) marketing and promotions has been democratized and are well within artists’ own capabilities. Since labels don’t offer artists much at all anymore why should artists give up 85% of the 60 cents on the dollar of revenues that Spotify pays out? When artists realize this then future recording contacts will reflect this and many artists will simply refuse to sign with labels allowing Spotify to engineer deals directly with the artist and possibly reduce performance royalties from 60 cents on the dollar to a lower amount. At any rate, even if Spotify is unable to increase its operating margin by reducing performance royalties, it will still be able to achieve profitability when aggregate subscription growth crosses a critical level and that is bad news for artists stuck in legacy contracts and possibly good news for new artists who are able to engineer distribution deals directly with Spotify. But it will only be good news for the artistic community if Spotify changes it’s royalty accounting methodologies from an opaque and complicated “ratio system” which disproportionately advantages “hit” songs and big artists to an accounting system that actually counts real streams and reflects the actual number of streams, something that should be easy in the age of “big data.”

  8. Steve Sinclair

    Mr Resnikoff, you are wrong about Spotify. All it has to do to survive and possibly IPO is to consistently reduce it’s losses by showing positive and accelerating subscription growth. History has shown that there is really only a place for one dominant player in any space, the others eventually disappear. I believe that in the streaming space that will be Spotify and they will acquire the subscribers as the others die off. The Spotify model and platform has proven it can be a hit in Scandinavia and that can be replicated elsewhere and will be. Let’s see what 2014 numbers tell us…..

  9. tippysdemise

    Offline listening, essentially the equivalent of a download, should require a higher price tier. This feature should have been separated from unlimited streaming from the beginning, and should have been marketed as a truly premium option. Had that happened, the up-sell probably would have been palatable to customers, as it would be seen (rightly) as a valuable offering, and it would have raised revenue for both content providers and Spotify.

  10. tippysdemise

    Apologies if this double posts but the first was apparently eaten. “Available offline”, the equivalent of a download, should have been separated from unlimited streaming from the beginning and priced in a higher tier. Content providers and Spotify win, and the customer likely would have accepted it if had it been marketed to them properly.

  11. ja

    ok, let me get this straight… so after the tech companies’ swindle of $billions from rightsholders and artists is constantly defended by internet-tards like the kids in mom’s basement and the pirate party (not mutually non-exclusive), we are supposed to feel bad that they might not get that 500th private yacht with our money??? Also, there’s no room for tears because clearly streaming is growing, and even if it wasn’t they’ve both already made their money and will just innovate a new way to fuck us over.

  12. Pikerella

    Who do these people think are going to be paying artists if streaming disappeared? The fact remains Spotify filled a gap for legal free listening that was created by demand. Nobody has their business model right yet, these are the dark ages for streaming services, but the fact remains they do provide an alternative to piracy that was doing a lot more to hurt artists income than no solution at all, which is what we’d have had without Spotify and those that followed. People do not spend huge amounts of money on music and future generations don’t care about ownership as much as past ones. More flexible commercial modelling is needed to offer a wider spectrum of products to cater to all music fans needs and pockets, but turning off streaming? You might as well search for the plug for the internet to save public libraries. There will always be an appetite for ownership (hence the growth in vinyl sales in recent years), but it’s not the future of music commercially.