Trade on Spotify’s IPO
There’s no need to wait until Spotify floats – take a position on its anticipated value now.
‘The future is markedly different from the past’ – Daniel Ek, co-founder, chief executive and chairman of Spotify.
The music industry entered the new millennium with little optimism, as sales continued to follow a decade-long trend of fizzling out. People were still listening to music, but increasingly weren’t willing to pay for it. Piracy was the single biggest threat to the industry, and the risk was growing as music became digital.
In 2003, Apple introduced the go-to model that would help the music industry get in shape for the digital era, by launching iTunes in tandem with its third generation iPod. Gone were the days of CDs and poor quality MP3s. People could purchase, download, and then instantly listen to a wide array of music.
Read: Will Apple be the first $1 trillion company?
Spotify, founded in Sweden, was launched only five years later, and its founders had a very different vision. The music industry had seen revenue plunge 29% between 1999 and 2008 to $16.9 billion, and it would slump another 15% to $14.3 billion before returning to growth in 2015, as Spotify’s streaming model began to gain momentum.
Industry sales have now grown three years in a row thanks to paid streaming services. The 2017 IFPI Global Music Report showed that download revenue declined over 20% in 2017, while streaming revenue rose by over 60% - the largest growth in eight years, that saw streaming overtake downloads, accounting for 59% of global digital revenue.
As Spotify prepares to launch an unconventional initial public offering (IPO), let’s have a closer look at the company, the offer and how to trade Spotify shares.
What is Spotify?
Ten years on from its launch, Spotify stands as an instrumental player in getting the music industry back on its feet, and has carved out a large share of the market in the process – claiming to have almost double the number of premium subscribers compared to its closest competitor: Apple’s rival streaming service, Apple Music (which was launched in the middle of 2015).
Spotify has an ‘access-based’ model which allows users to stream music on demand across different devices. It has a free service which is supported by advertising, and a premium service built around subscriptions. This differs from predecessors like Apple’s iTunes, that use a ‘transaction-based’ model where customers purchase and own the music.
Facts about Spotify
Monthly active users grew 29% in 2017 to 159 million
Premium subscribers grew 46% in 2017 to 71 million, representing 44.7% of its total customer base
Spotify operates in 65 countries, having recently added Israel, Romania, South Africa, and Vietnam
Spotify’s biggest national market is the US, with Brazil, the UK, and Sweden also being significant
Spotify has over 35 million songs, and 2 billion playlists in its music library
It has contracts with the likes of Universal Music Group, Sony Music Entertainment, Warner Music Group, and Merlin, which collectively controlled 85% of music streamed on Spotify in 2017
At the end of 2017, nine years after it was launched, Spotify had paid out 8 billion euros to rightholders and the music industry
Spotify files for IPO on New York Stock Exchange
Spotify Technology SA filed plans in late February 2018 to list shares on the New York Stock Exchange (NYSE).
Find out more about other upcoming IPOs for 2018
What is different about Spotify’s IPO: it’s a direct listing
There is a big twist with Spotify’s IPO. It is being referred to as a ‘direct public offering’, or DPO.
Businesses going public tend to expect high growth over the coming years and require cash in order to carry out their strategy, raising large amounts of funds through an IPO that it could not otherwise raise. The other primary reason is for the private owners and early investors to cash out, which is poignant in Spotify’s unconventional IPO.
Spotify will not issue any new shares under its ‘DPO’ and the only shares available will be from existing investors. Theoretically, all the shareholders could look to sell all of their shares on the day, or all of them could decide to sell none at all. In reality, it will be somewhere in-between.
‘We will have no input if and when any registered shareholder may, or may not, elect to sell their ordinary shares, or the prices at which any such sales may occur’ – Spotify.
Banks assist companies undertaking a typical IPO by establishing a price range for shares when a stock debuts, giving the market a starting point on how much the business will be worth when it goes public. This provides some stability and surety that prices don’t plunge from the first day of trading.
‘Sales of substantial amounts of our ordinary shares in the public market following our listing on the NYSE, or the perception that such sales could occur, could adversely affect the public price of our ordinary shares and may make it more difficult for you to sell your ordinary shares at a time and price that you deem appropriate’ – Spotify.
How much is Spotify worth?
‘The public price of our ordinary shares, upon listing on the NYSE, may have little or no relationship to the historical sales prices of our ordinary shares in private transactions…the public price of our ordinary shares may be volatile, and could, upon listing on the NYSE, decline significantly and rapidly’ – Spotify.
Spotify’s valuation consistently increased under private transactions in 2017, and reached a peak in January at $132.50 per share, valuing the business at about $23 billion.
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