Ahead of NYSE Listing, Spotify Valued at $13 Billion

Is Spotify outsmarting the market?  Or will a direct listing on Wall Street result in a Snapchat-like fate?

Earlier this year, Spotify faced a resounding rejection when attempting to list their IPO.  The reason was a real no-brainer.  Despite a reported $8 billion valuation, the Swedish streamer had yet to secure long-term licensing deals with major labels.

Furthermore, the company hadn’t presented a clear financial plan.  After ten years on the market, they had yet to post a single profitable financial report.

Obstacles for some companies.  Challenges for others.

Last month, Spotify finally secured the first of many long-term licensing deals.  The streamer inked a deal with UMG that included lower royalty rates.  But there was a catch.  Universal Music Group would limit some content to Premium subscribers for two week spans.  Spotify signed a similar deal with independent music representative Merlin just weeks later.

In both deals, UMG and Merlin have the option to lock down new albums behind a premium paywall.  These would serve as an incentive for ad-supported users to subscribe.  The numbers don’t lie.  A report recently published by Ooma shows that paid subscriptions brought in $2.479 billion in revenue last year.  Ad-supported services only brought in $469 million.

Now, Spotify’s deals with UMG and Merlin will serve as a template for negotiations with Sony Music and Warner.  Incidentally, rumors are swirling in the music industry that Warner will soon announce a deal with Spotify.  A source told the New York Post that Spotify and WMG have come close to a new royalty agreement.  The source said,

“We’re looking for a deal where both sides share in the risks and rewards.”

Sony Music, however, has yet to start negotiations with Spotify (as far as we can tell).

The negotiations come at a key moment for the Swedish company.  According to Reuters, Spotify will aim for a direct listing on the New York Stock Exchange when it goes public.  It was also recently valued at $13 billion.  The company is expected to go public late this year or early next year.

Two sources told Reuters that the Swedish streamer has worked closely with investment banks Morgan Stanley, Allen & Co, and Goldman Sachs.  They have advised the company on the direct listing process.  If successful, Spotify would become the first major company to carry out a direct listing on the NYSE.

In normal IPOs, investment bank underwriters sell the shares of a company to the public at a price.  Investor feedback determines the initial price.  Backed by an IPO syndicate, these underwriters lead the process.  The consortia is sometimes made up of more than a dozen banks.  These banks share the responsibility of selling and allocating shares to investors.

In a direct listing on the other hand, the company doesn’t raise money by offering new shares for sale.  Instead, they immediately make their existing shares available to the public.  Employees and investors can buy and sell as they want.  However, there are certain drawbacks by going down this route.  Direct listings make the stock more susceptible to sudden price fluctuations.  Direct listings also don’t have the so-called “lock-up” period, which would prevent employees and early-stage investors from selling shares immediately following listing.

Anticipating their listing on Wall Street, Spotify built offices in New York.  As they push forward with their plans to finally list the company on the NYSE, it has yet to state a clear financial plan.  This fact has potential investors worried.  Will Spotify become the first streamer to become profitable, or will it go down with poor financials, as Snapchat did less than a week ago now?

Featured image by htmvalerio (CC by 2.0)

16 Responses

  1. PaulWhySoMiffed

    When did Spotify previously try to list their IPO that was rejected? I think DMN is the only blog that ever said they had tried so are just reporting on your own mis-information?

    I would think this blog could put aside whatever problem they have with Spotify and embrace a direct listing that allows longtime employees to cash out if they want without a lockup while also not putting more money in the pockets of investment bankers. Paul’s bitterness has really gotten in the way of any credible reporting on this and clouds the integrity of your other posts as a result.

    • Anonymous

      Spotify probably declined to buy DMN 😉

  2. Vail, CO

    Paul didn’t even write this article. When he does he’s just reporting on the multiple times Wall Street turned down Spotify’s stupid IPO attempts (of which there have many this one included).

    • Weaksauce

      When did Wall Street turn down their attempts and what does that even mean? To my knowledge they have never tried bc they wanted to remain private longer. If Daniel had his way they would stay private forever. The investors want it public but without the music deals signed there was never any intent to try to go public without them.

      Paul didn’t write the article on this no, but he approved it and it’s his blog…

  3. troll

    Spotify should charge 15$ or 20$ so should all the other services, artists paid right + they make money, problem solved.

    • rikki

      exactly streaming is CHEAP CHEAP CHEAP……demand everyone pay more or stop bittchin about low pay

      artists we pay cheap because the public doesn’t think your music (today s music) is worth $1 a day

      • Chum

        Right – we went from a marketplace driven by radio and sales of hard copies of albums or singles – and where kids would share music with each other in order to have a larger collection – to everyone wanting the world available to them for dirt cheap.

        Surely there’s an economic model somewhere between charging $18 for a CD and $8/month (or whatever). Musicians & songwriters deserve to get paid. The idea that music is now essentially free is ridiculous, but I’m sure record labels fear raising prices too much in case the public goes back to file sharing to get their music fix.

        But as it stands right now, it really sucks.

  4. music stowaway

    Still the bottom line is that it’s profitless prosperity.. how can such an entity be really worth/valued at such an astronomical amount.. the recorded music business is never that big..

    • Weaksauce

      Look at Tesla, they’ve never made money either. Nobody is required to buy the stock and a direct listing does not give the company any money so why does it matter so much to you what the valuation is? If investors don’t think it’s worth less they will sell, more and they will buy the stock. It has no bearing on the underlying company when they go public.

  5. Anonymous

    I have a feeling this is not going to end well.

  6. Gordon Gekko

    Spotify is desperate to dump this stock on the public. With no lockup period the insiders will be selling stock inside out. I predict this stock will be under $5 one day.

    • Idiots everywhere

      You people are idiots.

      Under $5? What does that even mean?

      If there’s 10billion shares outstanding then it’s a $50billion dollar company.

      • GeKKout

        Yes but it is evil stock market game and they will fail! Gordon Gekko clearly has a grasp on the process;)

        The stock could be $275/ share or $2/share, without an understanding of how many shares are outstanding it means absolutely nothing.

  7. music stowaway

    Still, the revenue from paying customers and advertisers is not
    producing a cash profit.. This seems to be all about creating a value based largely on it’s market share position and reaping a HUGE PROFIT from an IPO but it’s not like selling a dozen eggs for $5 that costs the shop $3 thus making a $2 profit
    before costs.. MARKET SHARE – Yes market share is valuable and worth a premium but unless you stop the cash burn then it will
    eventually fold and those who sold out shortly after the IPO will be in the lucky league of billionaires and multi-millionaires.. but after the windfall there will no doubt be a burnt-out landscape like what nearly happened to Casablanca Records during the disco era when Neil Bogart was running the show.. the old phrase of shipping gold and returning platinum became synonymous with the label as did the term profitless prosperity.

    Eventually a business needs to make real profit to remain in
    business and not just an invented value by players in private
    equity circles and the share market.

    At least with Apple Music you have a company that has real value with hardware, software and an eco system that Apple consumers

    If you want to invest in the streaming business I would perhaps think of Apple Music first because 1. there’s no free tier, 2. the company already has billions in the bank and doesn’t need to go begging for more $ and 3. It’s a real business with real profits.

    • wrong

      Apple doesn’t make any money on music – iTunes sales or streaming. It is a loss leader for their hardware. Also Spotify stands to make nothing if they do a direct listing, they will actually have to pay bankers and attorneys while not offering new shares so they will not make any money on an IPO.

  8. music stowaway

    Can you substantiate what you said about Apple not making any money out of iTunes & Apple Music.. I would be interested to read real facts in that statement.