Spotify Is Worth $16 Billion And I’m Getting Scared

In private trading, Spotify is now reportedly worth $16 billion.  But when’s the profitability part?

Top executives jumping ship.  Years in operation without a profit.  Multiple financial reports showing ever-mounting losses.  Lavish offices that cost more than what the company earns.

Several months ago, due to a lack of a sustainable business model, SoundCloud faced the threat of bankruptcy.  The company was forced to shut down its luxurious San Francisco and London offices.  They also had to let go of 173 employees without warning.

In the end, SoundCloud was bailed out by investors.  Its CEO had to step down.  And a recent report shared with Digital Music News shows that it won’t become profitable until at least 2020.

Spotify’s a different company entirely.  It has 60 million paying subscribers.  It’s got a promising future on Wall Street.  But so did SoundCloud at one point in its history.

According to sources familiar with the deals, private trading in Spotify shares have valued the company at around $16 billion.  Three months ago, similar trades pushed Spotify’s valuation to about $13 billion.

That’s ahead of their rumored direct listing on the New York Stock Exchange.

Business Insider noted that thanks to rising subscription numbers and a strong demand for shares, Spotify may be worth $20 billion once it goes public.

GP Bullhound, a technology investment and advisory firm, estimated that the platform’s valuation could reach $50 billion.  The firm also happens to own shares in Spotify.

Investors and venture capitalists have stated that Spotify has cemented its position as the “undisputed market leader” in streaming.

While this sounds all well and good for the company, investors just have to look at the numbers to start worrying.

Spotify stands on financial quicksand.

Spotify first launched on October 7, 2008.  Since then, the company has yet to post a profit.  Losses have also continued to increase.  Net losses doubled in 2016 to $600 million.

Like SoundCloud, instead of focusing on building a sustainable business model, Spotify has spent the money it has yet to make.  According to details shared with Digital Music News, Spotify has sunk massive amounts into its World Trade Center lease.

How much?  The company has spent more than $566 million on a 17-year lease, with almost $31 million in upfront payments required.  The contract works out to $33.29 million a year on base rent alone, or $2.77 million a month.

Spotify’s opulent spending has caused more than a few investors to become anxious.  While a lot of hype surrounds the company’s IPO, some have compared the platform to Twitter and Snapchat.  Both companies have disappointed investors following their public listings.

Layer fears of a market softening ahead, and Spotify starts to look a bit shaky.

Speaking with Business Insider, Louis Citroen, an analyst at Arete Research, underscored the company’s financial uncertainty worrying investors.

“It’s hard to speculate on Spotify’s valuation since we only have historic results prior to the most recent renegotiation with the music majors.

“But a $20 billion valuation sounds punchy as it implies both that Spotify can continue growing customers at a fast pace, and that it might achieve a double-digit margin.  We can believe in the customer growth, but are less sure about profitability given high royalty costs and limited differentiation with rivals on content, price or technology.

On a global scale, revenue from music streaming continues growing.  Spotify has also recently secured lower royalty payments with UMG, Sony Music, and Warner Music Group, along with Merlin.

In addition, Spotify has over 60 million paid subscribers.  Its closest competitor, Apple Music, recently confirmed that it has reached “well over” 30 million subscriptions.

Spotify earned the impressive and uncontested 60 million mark in almost nine years.  Apple accomplished the feat in just two years.  It also has the money to invest in a music streaming platform in the long term.  Should Spotify fail to live up to the hype on the stock market, investors will quickly pull out.  Just like they did for Snap — or any over-leveraged, speculative play.

If and when Spotify’s IPO launches, will the company finally post a profit?  Or will it go down in flames and seem obviously over-leveraged in retrospect?


Image by RJA1986 (CC0)

12 Responses

  1. Felix

    Your comparison’s are slightly off – Soundcloud has virtually no revenue. While Spotify generated 3BN+ in 2016. Big difference.

    Yes, it took them 9 years to get 60m subs but that number is speeding up (unlike Apple’s which is relative stable since their launch). Everyone also predicted that Apple would immediately crush Spotify because they have 600m devices to market to immediately hasn’t happen.

    Now, is the company worth 16BN? Who knows. It is if someone’s willing to buy shares at that price and apparently there are. That’s all that matters on the stock market.

  2. Anonymous

    Nothing to fear. If they crash and burn, Apple and Amazon will pick up the subscriptions, and the industry will continue to make money.

  3. abcd

    The numbers are staggering.. a distribution platform that steams content owned by other parties.. The valuation seems kind of like an invented figure from the financial sector and largely based on it’s market share in the steaming space.

    Is the record industry ever this big?
    Is distribution king?

    Is this about music or is this about tech..
    Are we living in another tech bubble?

    Has Spotify become a billionaire making machine..

    • Paul Resnikoff

      This is starting to feel like a bubble. But bubbles make people rich, at least before they pop (and even then, there are people profiting off the inverse).

      In the case of Spotify, it’s hard to tell. There is the Amazon approach, in which profitability is an afterthought but once market dominance emerges, the effects are monstrous. Just ask any mall owner today.

      One other bit: looks like the major labels are getting the big, hearty last laugh here. They weathered years of criticism, and here they are getting a 2.34 billion guarantee over two years. And that’s just a baseline payment to play.

      • Anonymous

        I know you’re praying it’s a bubble 😉 You’ve got a lot of negative press riding on this.

      • Troglite

        Its been a long rime since i posted on this site. But, i wanted to challenge you on two reoccurring themes in your recent news coverage and commentary.

        First, there’s a huge difference between Amazon and Spotify. Amazon can become massively profitable at any time by not re-investing profits to fund accelerated growth/expansion. Spotify can’t lower their content costs… they’re baked into their business model.

        Second, i believe you’ve been consistently misrepresenting downloads in your other posts (but with the best of intentions). Every song you stream is cached, without exception. A download is simply cached for a longer period of time.

        You might find the privacy laws within the EU to be a more definitive point of reference on this whole concept. For years, companies interpreted these privacy laws in a narrow manner that focused on the location where the data is stored (If it’s stored in a datacenter within the EU, it complies with the privacy laws). That interpretation was eventually disproven in the courts which required a complete re-write of these laws. It is now understood and reinforced through legal precedence that a human viewing private data stored in the EU on a monitor screen in the US constitutes a “data transfer”.

        Digitization changes NOTHING in this regard. If my speakers are pushing air, the media has been reproduced and distributed from the original source to my location. Period.

        I have no objection to a complete rewrite of how works are licensed in the US. But, Spotify’s last minute assertion that mechanicals simply don’t apply to interactive streaming feels like an act of desperation. Its the only hope they have to avoid paying for the infringement that has already occurred.

        A fair and open marketplace requires the rules be knowable and consistently enforced. I hope the courts reward the businesses that played by the rules by punishing the companies that did not.

  4. SPOT

    If someone is willing to buy shares at a $16B implied valuation then that is what the company is worth for that trade. The secondary market is supply and demand so whether it is “worth” that much to Daniel, Paul or Dan Ek doesn’t actually matter; it was/ is worth that much for that trade.

    If people believed all of the negative articles on this blog about Spotify and passed up an opportunity to invest three years ago they’d have missed a big investment opportunity. This blog has been wrong 100% of the time on Spotify’s value so far but now they are right? There are countless examples of unprofitable companies that defied critics and went on to become successful and profitable but this has no chance? 60 million people seem to like it enough to pay for a subscription and a bunch of wealthy investors seem to like it enough to buy shares at double the last valuation. Those are facts.

  5. Blobbo

    Amazon was in the red for years. They aren’t that far from going there again. Modern Tech companies are pinatas of rice paper waiting for a match.

  6. Whatever.

    Bank bail outs, fake accounting, and fake-ass pie charts can make anyone look good in general. ;-D

  7. ZZ

    Here’s another fact for you Spot. Spotify is currently privately owned. That means we could not have invested in it even if we wanted to. And even once they IPO, it’s still a “direct IPO” which means you have to know someone to buy shares.

    Spotify is a great service, but the more money they make … the more money they lose. Why should DMN not report on that? That’s the job of the free and open press and I find them to be a trusted source and this is something that we as creators and consumers need to know. And I’ll give Spotify props … they’ve improved the value of music from worthless (free) to just barely worthless (fractions of a penny). So I guess that’s an improvement. But even if they doubled their subscription prices (which will probably occur shortly after this IPO) … that would still only help musicians buy two pizzas a month instead of just one. There has to be a better way.