Is Spotify Going Bankrupt In 2017? Wall Street Delivers Another Red Flag

Spotify: Going Bankrupt In 2017?

Photo: kasabubu (CC0)

Wall Street is rejecting their IPO (again).  A $1.5 billion debt pile is now a ticking time bomb.  Major labels are taking 70+% of revenues.  Is this the year that Spotify implodes?

Spotify is a damn good streaming music service.  And they’re beating almost everyone at this game.  That includes some of the largest companies in the world: Apple, Google, Amazon, and Microsoft.  In fact, Spotify has double the number of paying subscribers that Apple Music has.  Spotify may also have more customers than all of these competitors combined.

But at what cost?

Now, it looks like Spotify is postponing their long-awaited IPO.  Again.  According to details leaked by TechCrunch, the mega-streamer won’t be going public until at least 2018, thanks to continued Wall Street rejections.  “The delay would give Spotify more time to build up a better balance sheet and work on shifting its business model to improve its margins,” TechCrunch reports.

“The financial climate has changed…”

A major problem is that Spotify simply isn’t making enough money.  Go figure.  They’re growing fast, but the underlying financials are rotten.  “Three to five years ago, you could have an IPO based solely on user growth and promises of the future,” a TechCrunch source relayed.

“But the financial climate has changed now. Today you have to show some path to profitability, especially at the valuation that Spotify has been targeting.”

That might explain why Spotify is frantically trying to renegotiate its major label licenses.  Currently, the company is paying at least 70% to the big three: Universal Music Group, Sony Music Entertainment, and Warner Music Group.  According to data released last year, Spotify has paid a cumulative $5 billion in royalties since inception, none of which includes overhead, taxes, and guaranteed equity shares (if an IPO occurs).

All of which might explain why Spotify is hemorrhaging cash.

A major question is whether the major labels will budge.  And they may refuse, even if it means the implosion of one of the largest music streaming platforms on the planet.

But there’s a much bigger problem here.  Actually, 1.5 billion of them.  Last year, Spotify started taking monster loans, with heavy strings attached.  That includes loans of both $500 million and $1 billion, with investors in each pool making hideous demands if an IPO didn’t occur within one year.

On the first pile of $500 million, that one-year mark has already arrived.  That loan involved Swedish investors, who offered convertible notes that included a strict IPO schedule.  Specifically, if the company hadn’t gone public by January, 2017, major pricing discounts on eventual IPO shares would be triggered.

Now, another one-year deadline is arriving on the $1 billion loan, which carries far stronger penalties.

See the problem here?

Economic situation and global instability.

Separately, Spotify may be entering murkier geo-political waters, and a far more complicated Wall Street dance.  Enter the ‘T’ word, a massive shift that puts this Obama-supporting app in a tricky spot.  Currently, Wall Street is booming on hopes of a deregulated, tax-reduced America, though pesky problems like political violence, secessions, and even war are always bad for markets (and IPOs).

The Snapchat problem.

Meanwhile, the upcoming Snapchat IPO presents another strange wildcard.  Currently, Snapchat is the hottest babe on the block, and selling a totally different proposition to the street.  Whether their brand of profitless boom gets accepted by a more stringent group of investors remains unclear, however.

Indeed, boom time speculation is always fun.  But not always guaranteed.

Too big to acquire?

This we know: Spotify won’t be acquiring SoundCloud.  But is Spotify too big to be acquired itself?  Here’s another fun fact: the world’s largest streamer is now so wildly over-leveraged that an acquisition makes little sense for anyone.  And that includes the biggest whales, like Google, Microsoft, and Facebook.

That makes 2017 a seriously boom or bust year.  And if it doesn’t all go just right, it could be a bust, with ‘bust’ being ‘bankruptcy’.

And if you don’t believe that’s a possibility, then you probably couldn’t imagine Donald Trump in the White House, either.

So bookmark this page, and check back in a year or so.  THEN call me crazy.

30 Responses

  1. Well I guess

    The elephant in the room is that no one wants to pay for music anymore, period. A generation or so, has grown up having everything essentially free off of the internet. They don’t want to pay for anything.

    Reply
    • Graaf Orlok

      May be, but Spotify’s problems prove that people not wanting to pay isn’t working. Spotify is succesful because they have a free tier that’s basically the same as the paid tier – which is why they aren’t making money. Their business model is simply flawed as it relies on ad support and that just doesn’t cut it. However, if they would not have a fully functional free tier, they wouldn’t be by far the largest streaming service.
      And I wouldn’t know about mainstream music, but in metal there are people still willing to pay. They want a physical product, though, not an mp3.

      Reply
    • spacerobot

      They prob didn’t want to vote either. Well, welcome to reality, cupcakes.

      Reply
  2. Remi Swierczek

    Goldman is on board! Creative deception has to happen! TIDAL bullshit marriage with
    Sprint is just deeper PRELUDE to DEEPER music SWAM dancing!

    UMG streaming SUICIDE in very DEEP progress!

    Call me at any time if you have interest in saving music WACKO-LAND!

    Reply
    • Jim

      What are the solutions Remi?

      I’d argue that the labels have sucked at the internet for the entire internet era, that’s 20 years.

      Steaming came before MP3s, realaudio. .rm files and .ram files. The late 1990s. I was doing it, personally. And 20 years later, they can’t make it work? Back then, there were real barriers – storage was expensive, bandwidth was expensive. I was doing sites for bands, venues, I had my own sites and there was streaming audio and streaming video on all of them, I had streaming video on my own site, and the links to that content were on the band sites and the venue sites. I suspect that plenty others were doing something similar. Then myspace came around, and they pretty much won. There was no shortage of easy streaming there – right in the top right, 4 songs from the act, that was 10-15 years ago pretty much? Facebook ended up beating myspace, and facebook is far worse than myspace for bands. And the labels are where the labels are right now. It just isn’t very difficult, technically, to do streaming.

      SOLUTION – I’d like a prepaid model. I could buy a gift card, or just recharge my account, by adding more money to it. You could get a gift card at a Justin Bieber show (hint bkstg.com) And you pay for every stream. But you could get physical goods as well. You buy points, you pay with points. It’s not easy with micropayments, if you need a 3rd party to handle every transaction. Expensive. With a gift card, you’re getting their money, and your own systems will play their streams for them, host their videos, pretty much everything some websites or apps (see bkstg.com) are sending people out to other websites to do.

      So much content is somewhere else. On bkstg.com, instead of hosting their videos themselves, they’re linking out to youtube. On their audio, they’ve got links to Spotify or Apple Play or Google. Youtube and Spotify and Apple are all making money here, why aren’t the acts making that money?

      Ideally, you have the musicians as the owners. The musicians get all the money, minus the costs to run the thing.

      When you’re talking about Spotify, it looks like there are 3rd parties who want a percentage. When that 3rd party is taking a percentage, you know that you’d be able to get a better deal for the music makers,

      Basically, prepaid gift cards and topping off accounts with credit cards, allowing you to buy anything. Mastodon seems to use Ebay a lot. There could be an auction component, an ebay module. Tickets, selling merch, kickstarter type campaigns, pretty much any new innovation can be jammed into there. Steaming could work in many ways, the customer might say, I don’t want to pay more than 1/10th of a cent for a stream, and the app or browser will store that preference, and the website will only play songs that are cheap. Maybe the person only wants free streams, well, there would be free streams. Certain acts want to be heard, first and foremost, and they’ll set their preferences themselves. When something is new, perhaps it costs more. And everything is measured in points, where, maybe, a point could be one tenth of a cent. 10 = penny. 1000 = dollar. If an act has a new video, they might want to put it there first and charge a dime or a quarter to view it. And then change it in a day or a week. You click on it, you get a little pop up, maybe but not necessarily, this costs 25000 points, do you want to view it? Yes. and then 25000 points are deducted from their account. No ads are necessary, neither are major corporate sponsors. All the acts would be able to access all their data, they’d know how much they would (ideally) get paid. (this part could be tricky, there are expenses but if in some way there could just be, maybe, partial payment, whoever is doing this will have expenses, but if you said, hey, this is how it works, we’ll give you half of what we owe you every year, or half of what we owe you on digital

      Reply
      • Real Remi Swierczek

        Solution is LOCK UP of the music in virtual walls:
        -no tune info on radio display
        -no free Shazam or Google diverting you to free source.

        Play the best music you can for specific audience in specific place and CHARGE for ADDITION TO THE PLAY LIST!

        $300B global music business by 2030 at $.49 per tune.

        Google boys can do it SOLO with no government action!

        If Google hates MUSIC, I think they do, then UNITED EFFORT of the industry and mega stars has to give us new FAIR USE ACT that will prevent deep pocket Google and almost bankrupt Shazam or SoundHound from PIMPING MUSIC for free to the society of FREELOADERS!

        Reply
    • Remi Swierczek

      I have all the answers! I’m going to start my own band, and my own label, and my own service! Join me if you want a piece of the 1B pie I’m creating! 818-226-543O

      Reply
    • Remi Swierczek

      Will the real Remi Swierczek please stand up. I’ve got your deportation papers straight from Trump’s small orange hands.

      Reply
      • Real Remi Swierczek

        Poor Trump has own big struggle with brainwashed portion of the society!

        UMG has done to music industry what media, educational system and federal war on poverty did to almost half of the US citizens!
        USA is in good hands!

        Music is in trouble!
        Music business ruled by Sir Lucian, the knight without sword and Doug Morris his predecessor at UMG who retired as a CEO of Sony Music has no chance for obvious to an idiot $300B future!
        Insiders just consume old goodwill and prepare bowties for next Grammy Awards.

        $40B in 1999 music revenues is worth after inflation almost $60B today!
        We are at $16B!

        Time to finish with exciting and optimistic news coming from IFPI or RIAA.
        Music Business World is the MASTER of good news propaganda. Who owns this music land Pravda?

        Sir LUCIAN,

        There is no good news on the horizon!

        Wake up or quit.

        Reply
        • REAL REAL Remi Swierczek

          What is that I hear after your long winded ANNOYING comment? Crickets. Go back home to India. Praise be to Spotify!

          Reply
          • Real Remi Swierczek

            My roots are at ZERO AVENUE, Carnegie, PA. You and UMG team should take a hike to LaLa Land! It is overdue! Music deserves $200B to $300B annual business. Let’s roll the sleeves, all LaLa folks and take hug Google to sanity or take it on the UNITED (Trump included) pitchfork and throw it out of your beloved 17 year old music swamp!

          • Real Remi Swierczek

            Your roots are in India. Case closed. Now go back there beore the door hits you! Praise be to Spotify!

  3. Party Favorz

    I noticed there was no mention of Pandora in this article. Believe it or not, they still exist even though they’re considered the MySpace of streaming and Spotify is Facebook.

    Spotify is a facilitator of music that presents more options and opportunities than would otherwise be available to struggling artists. They didn’t set the standards for what labels offer their artists with the 360 deals; specifically how it relates to streaming, yet the labels have nailed them for more and more, while artists complain that what they payout is insufficient. At the end of the day, Spotify does what it does to make a profit; not to be a spiget for the major labels who never bothered investing in the infrastructure for streaming muchless ever figured out a way to properly moentize their industry beyond the business models of decades past. You would think after Napster they would…oh, why bother.

    Best option is to reduce the free-tier offering to 30 days and begin to sign exclusive deals for concerts and merchandising where they get a bigger slice of the pie. They’ve got the audience, which means they have the leverage. Tidal tried but failed spectacularly. Spotify is in a unique position to take advantage of that failure.

    Meanwhile, Apple Music, Google Play, YouTube and now Amazon Music have enough money in the bank to take a loss while they slowly cipher listeners away from the streaming giant.

    Spotify needs to think outside of the box to be able to generate revenue much like Facebook figured out a long time ago. You’e got something really big that people like. Figuring out how to properly monetize it is the problem. The solution is there but they need to get with the program before someone else figures it out.

    Reply
  4. Kellyanne Conway

    Ha, this feels like a big stretch bordering on fake news, but that’s not a surprise from this source. Lots of assumptions here. Spotify has a ton of cash on hand to play with since it walked away from Soundcloud and now they’re putting it to good use. They’re staffing up, expanding the offering, and doing their due diligence with contracts and renegotiations where possible. They have a ton of overhead that could be eliminated quickly and easily if and when an IPO made sense. Sure, they have some aggressive loan terms, but they’ve obviously done the math on going IPO now vs. later. For a more “fair and balanced” look at this, read the original source.

    Reply
    • Juan

      The only reasonable answer in this site, where both comments and articles are insane.

      Reply
  5. Adam

    Even a basic analysis of cash on hand vs. historical losses shows they have 2-3 years of money in the bank. Easy.

    Come on Paul. Let’s not be fake news now.

    Reply
    • Paul Resnikoff
      Paul Resnikoff

      3 years? Really?

      I was just speaking with an investor last night. Pretty large stack to play with. He’s nt doing anything long-term in this political climate; moreover, he’s trying to recall or minimize impact of existing longer-term stuff.

      Reply
        • Juan

          Obviously he can’t math, and he hates Spotify for some reason. (endorsing?).

          Truth is that every thing he writes is brainless bullshit about how Spotify is doomed

          Reply
  6. Real Real Remi Swierczek

    I pray to Spotify every night before going to bed. Spotify is my God.

    Reply
    • Really Real Remi Swierczek

      If only I could get Spotify to open up in India, I would move there in a heartbeat and start a 320B music industry there!

      Reply
  7. Carl Sagan

    I am not sure what to call this. It certainly is not an analysis since it is based on something other than facts. Spotify still has cash to finance its expansion and support losses for another 3 years at least.

    As soon as they slow down the growth in order to focus on profit, it will be profitable, very profitable even without major changes. However some changes would speed up the process, specially on their Payment solutions and Monetization features.

    Reply

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