Notes

udes ad-supported free listeners of 159 million, and around 70 million paid subscribers as of January 2018. The company was founded in 2006 by Martin Lorentzon and Daniel Ek, who remains its current CEO. Ek explained his position in a company blog post published yesterday. “Spotify is not raising capital, and our shareholders and employees have been free to buy and sell our stock for years,” he wrote. “So while tomorrow puts us on a bigger stage, it doesn’t change who we are, what we are about, or how we operate.” Spotify is the biggest company to ever go public via direct listing, and the first on the NYSE.

Spotify’s IPO paperwork showed that it is going through a huge amount of cash — posting revenue last year of around $5 billion and a net loss of around $1.5 billion for the same period — but its gross margin is growing, thanks to newly negotiated licenses with the major labels. These deals not only reduce Spotify’s royalty payouts, but will allow the company to predict their music costs for several years. However, there are obstacles for Spotify to dodge as it continues to grow. Recently, it had to crack down on users running modded versions of the app to stream music for free while blocking ads. Spotify’s IPO filing notes that about 2 million users are getting around ads on Spotify without paying, or around 2.5% of all free Spotify accounts. It also has lawsuits still lingering around over mechanical licenses to the tune of $1.6 billion. Despite this, it’s impossible to deny Spotify’s success over the years as one of the earliest and most promising music streaming businesses. Its closest competitor, Apple Music, only has 36 million paid subscribers. Spotify is predicting it will be just fine in 2018 by continuing to focus on its central revenue stream of user subscriptions. The company is projecting as many as 96 million paid subscribers and a 30 percent increase in revenue to $6.6 billion by year’s end. Bumping up subscriptions alone likely won’t fix the catch-22 of Spotify’s business model, where the more money it makes, the more money it pays out to the labels. It needs to find additional revenue streams or continue to work on reducing label payouts. The latter is a tough ask. Trying to appease everyone when no one is satisfied is not an enviable position for Spotify, but it’s the one they’re currently in. Artists are already only making fractions of a cent per stream on the platform and labels are still slow to change old habits and recognize the new, modern market of music consumption. This doesn’t leave Spotify without options - it could give the labels greater equity, for example.

Ultimately, how successful Spotify’s public offering is will depend on whether investors believe there is a light at the end of the tunnel when it comes to profitability and how sustainable its business model is, not just for its own bottom dollar, but for the artists that are its lifeblood.