Its interesting to read that although Spotify is seen as the darling of the music industry through its music streaming service, some are calling into question its ongoing business model as it gears up for an IPO, but which could be delayed until 2018
The Numbers
Spotify has done very well and has amassed a huge number of users; 100 million at the last count, with 40 million of those paying customers. It is seen as the leader in the music streaming services, leading the way from other such as Tidal, Apple Music and Amazon Prime Music.
Its a major player in 60 countries including the biggest market, the US where streaming accounts for 51% of all music consumed. Billboard Power 100 list of music influentials, names Daniel Elk, its Chief Executive at the top of its ‘movers and shakers’ list
Royalty Woes
Despite the success and accolades for the music service, trouble could be brewing as it plans to go public. This is all down to the mechanics of its recent investment of $1bn, the terms of the conversion of the debt into equity and the timing of its IPO.
Content is crucial for the future success of Spotify and so needs to secure ongoing deals with the major record companies to survive. Its pays approximately 55% of its revenue to the record companies and to music publishing companies.
To improve its bottom line (and be profitable), it would like to reduce the payments to the record labels, but artists are already up in arms due to the poor royalty payments they currently receive from streaming services (see Taylor Swift, Prince)
The conundrum that Spotify faces, is that under the terms of its agreement, the longer the delay to its IPO, the more the interest rate it pays to service the loan increases. Coupled with a diminishing percentage that it can convert to equity, thereby lowering the proceeds that can raised by the IPO
Spotify has undoubtedly been a success story but many would be surprised to learn that it isn’t profitable. With an IPO planned, scrutiny must be given to its business model to prevent another music failure
Also published on Medium.
