Spotify IPO: Music-streaming startup hopes stock offering is a smash hit

From its launch in 2008, Spotify has defied convention in building an industry-bucking music-streaming service with millions of users and plenty of hype. So it is perhaps no surprise that the internet company is taking an unorthodox route in going public on Tuesday on the New York Stock Exchange.

Founded by Daniel Ek, a startup veteran who began his first company at the age of 14, Stockholm, Sweden-based Spotify has weathered its share of controversies, including tussles with powerhouse artists like Taylor Swift over how much they are paid for their work.

In an interview with CBS This Morning, Ek said that while he would look at the stock price when it opens, he feels the company is only in the “second inning,” emphasizing his focus on the long term.

“While this is obviously a big day and I’m very proud of my employees, I really just feel like we’re in the early days, not celebrating the end days as so many other companies are doing,” Ek said.

Steep competition 

Investors eyeing Spotify are chiefly concerned with two things: The company’s profitability, and the steep competition from tech titans such as Apple Music, Amazon Prime and Google Play. Apple has 36 million subscribers, compared with Spotify’s 71 million paid users. The Wall Street Journal recently reported that the iPhone maker could overtake Spotify in the U.S. as soon as this summer.

Ek said he isn’t concerned about the competition — for now.

“We are about twice the size of them [Apple] so I think we’ve still got some room and I’m very happy with the growth that we’re seeing in our business–I can’t speak for them– but I feel pretty comfortable.” Ek said. “What we’ve found is when we have competition, it actually grows the market, because more people are now talking about streaming.”

Spotify is banking on strong subscriber growth for a boost — for 2018 it expects its number of premium subscribers to hit 92 to 96 million.

Despite its rapid growth, estimates of its worth are all over the map.

“One of the things that is driving a lot of the uncertainty, this range of valuations, is that the company is highly unprofitable, has a lot of major competitors and has few direct public peers,” Matthew Kennedy, an analyst at IPO research provider Renaissance Capital, told CBS Moneywatch.

But, he said,”Spotify will be the only direct play on subscription music streaming or at least by far the largest. It is twice as large as Apple music…it has over $5 billion in annual sales and it does have positive free cash flow.”

Still waiting on profits

Spotify earned 90 percent of its roughly $5 billion in revenue in 2017 through its paid subscribers; the rest was made up by ads for its ‘free’ music product.

Still, the company isn’t profitable. It reported a loss of $1.5 billion last year. One big reason is the money it spends on licensing content. Spotify estimates it has paid artists $8 billion over its short history. The company has said it pays nearly 70 percent of its revenue to the music community.

In the U.S., subscribers can pay $9.99 per month for a standard music streaming plan, or $14.99 for a family plan with up to five accounts. The service offers 3 million artists and creators, and more than 35 million tracks. It acts as part streaming music library, part social network, with users able to follow recommendations from celebrities and their friends on Facebook.

Straight to market

Spotify is pursuing an unusual direct listing on the NYSE, bypassing the conventional offering that companies of its size normally take. That makes it difficult for investors to know if the listing will be a hit with investors or a total flop.

Such listings, sometimes called a “direct public offering,” cut out traditional underwriters that would line up investors, drum up interest for the stock and help support the initial stock price. Spotify, which is valued at more than $8 billion according to research firm CB Insights, isn’t creating additional shares for the IPO because it doesn’t need to raise money. Instead, current shareholders will be able to sell their existing shares, and are not restricted on when they can do so.

Spotify laid out a number of reasons for listing its shares via a direct offering, including providing equal access to all buyers and sellers.

But it could make for a volatile entry into the public market, as the number of shares that will be offered and the price investors will pay is anybody’s guess.  Underlining the uncertainty of the company’s value, estimates for expected share prices collected by IPOScoop.com range from $49 to $131.

“The whole thing is going to be a surprise. What is going to be the price, and who wants to buy it and in what price range?”said John E. Fitzgibbon Jr., founder of IPOScoop.com. “There are only two people involved in this underwriting — the sellers and the buyers.”