All posts in “Spotify IPO”

Here’s why Spotify will go public via direct listing on April 3rd

Spotify explained why it’s ditching the traditional IPO for a direct listing on the NYSE on April 3rd today during its Investor Day presentation. With no lockup period and no intermediary bankers, Spotify thinks it can go public without all the typical shenanigans.

Spotify described the rationale for using a direct listing with five points:

  • List Without Selling Shares  – Spotify has plent of money with $1.3 billion in cash and securities, has no debt since it converted that into equity for investors, and has positive free cash flow
  • Liquidity – Investors and employees can sell on public market and sell at time of their choosing without investors shorting a lockup expiration, while new investors can join in
  • Equal Access – Bankers won’t get preferred access. Instead, the whole world will get access at the same time. “No underwriting syndicate, no limited float, no IPO allocations, no preferential treatment”.
  • Transparency – Spotify wants to show the facts about its business to everyone via today’s presentation, rather than giving more info to bankers in closed door meetings
  • Market-Driven Price Discovery – Rather than setting a specific price with bankers, Spotify will let the public decide what it’s worth. “We think the wisdom of crowds trumps expert intervention”.

Spotify won’t wait for the direct listing, and on March 26th will announce first quarter and 2018 guidance before markets open. It also announced today that there will be no lock-up period, so employees can start selling their shares immediately. This prevents a looming lock-up period expiration that can lead to a dump of shares on the market that sinks the price from spooking investors.

It’s unclear exactly what Spotify will be valued at on April 3rd, but during 2018 its shares have traded on the private markets for between $90 and $132.50, valuing the company at $23.4 billion at the top of the range. The music streaming service now has 159 million monthly active users (up 29 percent in 2017) and 71 million paying subscribers (up 46 percent in 2017.

During CEO Daniel Ek’s presentation, he explained that Spotify emerged as an alternative to piracy by convenience to make paying or ad-supported access easier than stealing. Now he sees the company as the sole leading music streaming service that’s a dedicated music company, subtly throwing shade at Apple, Google, and Amazon. “We’re not focused on selling hardware. We’re not focused on selling books. We’re focused on selling music and connecting artists with fans” said Ek.

Head of R&D Gustav Soderstrom outlined Spotify’s ubiquity strategy, opposed to trying to lock users into a “single platform ecosystem”. He says Spotify does “what’s best for the user and not for the company, and trying to solve the users’ problems by being everywhere.” That’s more shade for Apple, who’s HomePod only works with Apple Music despite customers obviously wishing they could play other streaming services through it.

By now being baked into a wide range of third-party hardware through the Spotify Connect program, Soderstrom says Spotify gets a more holistic understanding of its listeners. He declared that Spotify has 5X as much personalization data as its next closest competitor, and that allows it to know what to play you next. He cheekily calls this “self-driving music”.

By directing what people listen to, Spotify becomes the new top 40 radio — the hit-maker. That gives it leverage over the record labels so Spotify can get better licensing deals and favorable treatment. Now over 30 percent of Spotify listening is based on its own programming through featured playlists, artists, and more.

Spotify CEO Daniel Ek giving the Investor Day presentation

Wall Street loves a two-sided marketplace, so Spotify is positioning itself in the middle of artists and fans, with each side attracting the other. It’s both selling music streaming services to listeners, and selling the tools to reach and monetize those listeners to musicians. That’s both on its platform, and using its targeting and analytics info to deliver efficient ticket and merchandise promotions elsewhere. Ek discussed the flywheel that drives Spotify’s business, explaining that the more people discover music, the more they listen, and the more artists that become successful on the platform, and the more artists will embrace the platform and bring their fans.

Yet with music catalogues and prices mostly similar across the industry, Spotify will have to depend on its personalized recommendations and platform-agnositic strategy to beat its deep pocketed competitors. Music isn’t going away, so whoever can lock in listeners now at the dawn of streaming could keep coining off them for decades. That’s why Spotify not raising cash for marketing through a traditional IPO is a strange choice. But with its focus on playlists and suggestion data, Spotify could build melodic handcuffs for its listeners who wouldn’t dream of starting from scratch on a competitor.

You can follow along with the presentation here.

For more on Spotify’s not-an-IPO, check out our feature piece:

Going public pits Spotify’s suggestions versus everyone

The secret to Spotify’s public market debut is actually an acquisition it made in 2014. The Echo Nest was powering music recommendations for Beats Music, Rdio, Vevo, and iHeartRadio too before Spotify pulled it out from under them by buying it for a reported $100 million — 90 percent in Spotify equity. That deal paid off big time, as it’s turned the startup from a daunting search box for 35 million songs into a personalized mixtape.

Today, in Spotify’s SEC filing to go public through an unusual direct listing, the company writes that “a key differentiating factor between Spotify and other music content providers is our ability to predict music that our Users will enjoy. Our system for predicting User music preferences and selecting music tailored to our Users’ individual music tastes is based on advanced data analytics systems and our proprietary algorithms.”

That data came from The Echo Nest. 200 petabytes of user behavior data to be exact. That’s compared to the 60 petabytes Netflix had in 2016. Spotify logs 150 billion plays, shares, skips, follows, and other signals per day that tune its recommendations.

This all powers Spotify’s popular curated playlists like Rap Caviar that consume 31 percent of users’ listening time, up from 20 percent two years ago, and the Discover Weekly algorithmic playlist that keeps them stocked with music. Always knowing what to play next has helped Spotify climb to 159 million monthly active users (up 29 percent year-over-year) and 71 million paying subscribers (up 46 percent year-over-year).

Those users are loyal, spending 25 hours per month streaming Spotify’s content. Just 5.1 percent of subscribers churn out monthly — a low rate for a subscription service which has come down from 7.5 percent two years ago. Spotify accounted for 42 percent of the global streaming in 2016, and by 2017 its subscription fees and ads earned it $4.09 billion in revenue.

But most importantly, those recommendations are what makes Spotify the go-to streaming service for serious listeners amidst an unbelievably crowded field of competition. “We believe Spotify is differentiated from other services because we provide Users with a more personalized experience, driven by powerful music search and discovery engines” writes Spotify CEO Daniel Ek in today’s letter to potential investors. With similar catalogues and playback features, its Spotify’s understanding of what we want to hear that keeps people from straying.

And there’s plenty of places to stray. Apple and Google pre-install and promote their streaming apps on their mobile operating systems, while charging Spotify a tax on subscriptions bought through its platforms. YouTube’s vast catalog of legally grey music uploads and snazzy videos appeal to younger listeners. SoundCloud offers the newest emerging artists. Amazon is using its Echo speakers and Prime subscriptions to get its music service into millions of homes. And there are still CDs, vinyl, MP3s, iTunes downloads, FM and satellite radio, and stalwart online radio services like Pandora.

But none combine the dedicated music recommendation prowess Spotify has built up with the on-demand access listeners crave and a free ad-supported tier to lure people in. “With access to unprecedented amounts of data and insights, we’re building audiences for every kind of artist at every level of fame and exposing fans to a universe of songs” Spotify CEO Daniel Ek writes in his letter to investors.

And because music lovers trust the app to tell them what to play, Spotify has managed to build up some leverage to negotiate with the record labels and rights organizations  that control the content it streams. Spotify can favor whatever music it wants, replacing top 40 radio as the most crucial hit maker in the business. And its ads and subscription revenue payouts have helped turn the music industry around after MP3 piracy and unbundled $1 singles cratered the post-CD landscape. Musicians and their management are finally starting to need Spotify as much as it needs them.

That’s the only reason Spotify can go public despite being so dependent on these rights holders. Otherwise, they could just jack up their licensing and royalty rates, and if Spotify refused to pay, they could pull their music. That’s especially worrisome for a public company with all its financials laid bare. Earn too much profit, and the rights holders would just cut it down to size. But they’ll play nice since Spotify selects what becomes popular.

Spotify CEO Daniel Ek (left) and The Echo Nest CEO Jim Lucchese (right)

The democratization of music creation and distribution necessitates a new layer of curation that Spotify wants to provide. “The old model favored certain gatekeepers. Artists had to be signed to a label. They needed access to a recording studio, and they had to be played on terrestrial radio to achieve success” Ek writes. Nowadays with so much content coming out, “artists’ biggest challenge is navigating this complexity to get heard. We believe Spotify empowers them to break through.”

To keep its crown, though, Spotify will have to stay a step ahead of everyone else’s recommendations. Its public filing lists their bigger brands, bank accounts, hardware, and app stores as significant risks. While Spotify has nearly twice as many subscribers Apple Music, the competitor is growing fast by giving away free one-month trials, paying for exclusive early access to blockbuster albums, and pre-loading the app on iPhones. Apple printed $20 billion in profit last quarter while Spotify has lost $4 billion to date.

Spotify will have to not only surface the best content, but create some too. By producing exclusive in-house audio and video, it could seduce subscribers and avoid royalty pay-outs. Spotify will have to figure out not only what we want to hear, but what we want to see. By displaying better ‘behind the music’ factoids, lyrics, slideshows, and more while we listen, it could add a unique dimension to the same songs streaming elsewhere. And it must be seen as a true ally to musicians, podcasters, videographers, and beyond. By winning their hearts, Spotify could get them to promote it as the home for their content that lives elsewhere too.

Surrounded by tech’s titans, Spotify may still be the underdog in the long-run. But by becoming the world’s DJ, Spotify has established itself as indispensable to the music industry. This jukebox sounds worth your dime.

Check out all of TechCrunch’s stories about Spotify going public, and read our feature piece “How Spotify is finally gaining leverage over the labels”

Spotify plays the long game with Family and Student Plans even as revenue per user drops

Spotify’s “Family Plan,” a variation of which launched in 2014, as well as its “Student Plan” appear to be driving a significant portion of the company’s growth and improving retention, as the company points to it multiple times in its filing for a direct listing on public markets today.

But that also comes at a cost of decreasing the amount of revenue it actually gets from each premium subscriber. In the filing, Spotify indicates that the fee for a family plan — which costs $14.99 per month — can be actualized over as many as six accounts total (though it might not always be six). The premium user consists of the one master premium account, which pays for the subscription, and up to five sub-accounts for family members. Spotify is also pointing to its student plan, which costs $4.99 a month, as another contributing factor to those pressures. This means that even though Spotify is gathering more premium users, the actual revenue it generates from those users can drop over time.

And, indeed, that’s what’s happening, according to the filing. Spotify said its premium average revenue per user was around €5.24 in 2017, compared to €6.00 in 2016 and €7.06 in 2015. Spotify recognizes in the filing (“Family Plan” is mentioned nearly three dozen times) that this is partly due to the family plan. But at the same time, churn — a significant metric for subscription services that shows how many users are coming and going — is dropping each year and the number of hours users are listening are significantly increasing. Churn was 7.5% in 2015, and it’s down to 5.1% in 2017, content hours have more than doubled in that time from 5.4 billion hours to 11.4 billion hours.

Here’s the boilerplate from the filing:

The rate of net growth in Premium Subscribers also is affected by our ability to retain our existing Premium Subscribers and the mix of subscription pricing plans. We have increased retention over time, as new features and functionality have led to increased User engagement and satisfaction. From a product perspective, while the launches of our Family Plan and our Student Plan have decreased Premium ARPU (as further described below) due to the lower price points per Premium Subscriber for these Premium pricing plans, each of these Plans has helped improve retention across the Premium Service. As a result, while Premium ARPU declined by 9% from 2015 to 2016 and 14% from 2016 to 2017, in part due to the launch of the Family Plan in 2016, Premium Churn declined by 1.1% from 7.7% in 2015 to 6.6% in 2016 and declined by an additional 1.1% from 6.6% in 2016 to 5.5% in 2017. With the growth in higher retention products, such as our Family Plan and Student Plan, we believe these trends will continue in the future.

All this is more or less part of a long game for Spotify, which is looking to go public in the U.S. amid significant and increasing competition for premium subscribers from companies like Apple or Google. Those two companies also own the App Store platform and therefore could be the decision-makers in the economics of operating on mobile devices, which means that there’s pressure for Spotify to snap up as many users as possible — even if it means making less money per user. Spotify has acknowledged in its public filing, too, that Apple and Google represent a significant risk in this sense.

Even with double the subscribers, Spotify says Apple will always have an edge owning the app store

Spotify just filed for a direct listing in the U.S., sidestepping the traditional IPO process, and now we’re starting to see some of the true financial guts of the company — and some of the significant risks it faces from challenging services from Apple and Google.

Apple, for example, charges apps a percentage of revenue for subscriptions processed through the App Store. Apple Music, meanwhile, will always deliver Apple 100% of the subscription revenue that it receives from subscribers (sans record fees and all that kind of stuff, of course). Apple, too, has a direct integration with its iOS devices and also a huge amount of brand recognition even though Spotify is a massive service. Spotify says it has 159 million monthly active users and 71 million premium subscribers, while Apple has 36 million paying subscribers as of February 2018.

Here’s the full boilerplate from the filing:

Our current and future competitors may have higher brand recognition, more established relationships with music and other content licensors and mobile device manufacturers, greater financial, technical, and other resources, more sophisticated technologies, and/or more experience in the markets in which we compete.

In addition, Apple and Google also own application store platforms and are charging in-application purchase fees, which are not being levied on their own applications, thus creating a competitive advantage for themselves against us. As the market for on-demand music on the internet and mobile and connected devices increases, new competitors, business models, and solutions are likely to emerge.

As owners of the platforms themselves, Apple and Google will always be able to dictate the terms. And while Spotify is a massive service, its success still hinges on users listening on their mobile devices. It may be able to build a strong brand and create some inertia against potential changes from Apple that could incite user backlash, but at the end of the day, Apple runs the system where its users actually get the service.

As Apple begins diversifying its revenue streams to create a services branch that the company likes to say will be the size of a Fortune 100 company, music is increasingly becoming a core part of that. Google, too, owns its app store platforms, and will recognize 100% of the revenue from its own service. We haven’t seen the full potential of these companies’ approaches to the music space, in particular with Apple Music which appears to be steadily growing, but Spotify is clearly recognizing it as an existential threat.

Spotify “Sponsored Songs” let labels pay for plays

A mysterious “Sponsored Content” opt-out setting recently appeared in Spotify, and now the streaming giant has confirmed to TechCrunch what it’s about. Spotify is now testing a new “Sponsored Song” ad unit that a company spokesperson tells us is “a product test for labels to promote singles on the free tier.”

Instead of appearing as obvious ad banners like Spotify’s existing ads, labels can pay to have Sponsored Songs appear on playlists you follow or potentially elsewhere on the service. These can be targeted to appear to users with matching listening tastes so they fit alongside their other music. And these Sponsored Songs will be instantly playable and saveable instead of requiring an initial ad click first.

It’s not clear whether Spotify is charging labels based on cost per impression, action, listen, or some other method. You can see an example of one design for Sponsored Songs below, spotted by Liam Maloney, that shows the track Call Me by NEIKED featured separately above the songs in a playlist.

Call Me by NEIKED appears as a Sponsored Song above this playlist

Spotify tells me that if the test is succesful, Sponsored Songs ads could roll out officially, but would only appear to users on the free tier. The opt-out option found under Sponsored Content in the Spotify settings menu would let people hide these ads from view, though it’s unclear whether that option would be available to users who don’t pay for ad-free Spotify Premium.

Sponsored content could help Spotify squeeze more dollars out of its ad-supported free tier listeners who don’t earn it as much as paid subscribers. If these people don’t want to pay, Spotify has to find more ways to monetize them without annoying them so much that they ditch the streaming app.

At the same time, Sponsored Songs harken back to the dark days of radio payola, where labels paid DJs at radio stations to put their artists’ songs on the air. Congress clamped down on the practice in the lat 1950s and the 2000s. Cearly marking Sponsored Songs as ads could get Spotify and the labels around the rule, but similarly degrades the quality of music on a playlist (or radio station) in favor of earning extra money.

Beyond more traditional banner ads that point internally to new albums or externally to any business’ site, last year Spotify began letting businesses sponsor its most popular playlists. This allows them to add a logo at the top, and include video ads that free tier users can agree to watch in exchange for 30 minutes of ad-free listening.

Spotify recently added an opt-out for Sponsored Songs in the settings menu

Sponsored Songs could slip right into Spotify without interrupting the listening experience. When targeted well, users might not even notice a song is sponsored. But the labels hope they’ll get the tune stuck in their head, saving it to their Spotify library, sharing it with friends, returning to listen to more of the artist’s music, and eventually earning money directly for the musician and label by buying concert tickets or merchandise.

In that sense, Sponsored Songs take a cue from Spotify’s most popular product feature: Discover Weekly. Instead of trying to get people to find new songs through a clunky blog-style Browse interface in Spotify, Discover Weekly uses a personalized, weekly-updated playlist that works like the familiar playlists users create themselves.

Spotify’s Are & Be playlist, sponsored by TV channel STARZ, has over 3.3 million subscribers

Demand to buy Sponsored Song spots on playlists run by Spotify demonstrates the effectiveness of Spotify’s strategy to gain leverage over the record labels.

If Spotify can make its own playlists the most influential tastemakers on the app, rather than artist-to-fan messaging or viral sharing, it can dictate what songs become hits or reach the Top 40 radio beyond its walls. For example, its Rap Caviar playlist has over 7 million subscribers. Then, if labels want a hit, they’ll have to play ball with Spotify — either by cutting it friendly royalty deals or by paying it directly through Sponsored Songs to get exposure on these playlists.

It’s all part of Spotify’s push to IPO. It needs to earn more money so it can pay the labels their royalties and still have enough left to cover operating expenses and turn a profit. Spotify earned $3.3 billion in revenue in 2016 off its 140 million total users and 50 million paid subscribers, but it still lost $390 million on operating expenses due to royalties and investments in growth. It’s even agreed to pay out $2 billion to labels over the next two years for lower royalty rates.

In the razor-thin margin business of streaming where it competes with giants like Apple and Amazon that don’t rely on music, Spotify must do anything it can to survive. By relentlessly promoting its own playlists so users subscribe, Spotify has built well-traveled sub-properties within its app where it can sell ad space.