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#ISPE: Spotify, the Netflix of music

The IPO in New York of Spotify, the Swedish world leader in streaming music , could take it in the medium term to the Olympus of consolidated technology in the stock markets. Founded in 2008 by the computer engineer Daniel Ek , current CEO, and Martin Lorentzon , Spotify today occupies a position in the music sector similar to that of Netflix in movies and series.

Spotify last year reached 157 million users, of which 71 million are paid that pay on average about 10 dollars a month, with revenues for the company of 4,100 million dollars in 2017. Currently, Spotify copa 41% of the market global music streaming . The second of the list, Apple Music, has 38 million paid users. At a considerable distance are Amazon and YouTube. It is no coincidence that its founders have chosen this moment to go public: their paid users have quintupled in just two years, from 15 million in 2015 to 71 million last January.

For its part, revenues have multiplied almost seven times in four years, from 746 to 4,100 million dollars. And there are no signs that the pace will slow down. On the contrary, the company expects to reach 170 million users in 2018 – almost 100 million of them for payment – and that its revenues reach 6,500 million dollars, 58% more than in 2017.

The company is currently valued between 20,000 and 23,000 million dollars. In spite of everything, some analysts are skeptical. The disembarkation of technological companies in the stock markets usually raises big doubts because they move in businesses and sectors created by themselves, which means that they do not have references with which to compare.

Spotify’s biggest problem is the price it pays for the use of music by the big three of the record industry: Sony BMG, Universal Music and Warner Music, which control more than 60% of the market. Spotify dedicates 85% of its income to pay to music publishers and musicians and composers, a figure that leads many analysts to doubt that it will ever get to benefit. Since its foundation, the red numbers have increased in the same proportion as the number of users. Thus, in the last five years their net losses exceeded 2,800 million dollars. Too many users pay nothing, a very onerous liability.

The business model ( freemium ) of Spotify makes the music consumption of non-subscribers theoretically covered by advertising. But those revenues do not cover even the expenses, even minimally. Spotify considers, however, that these users represent a potential pool of paid users. In fact, 60% of new subscribers start on Spotify as free users. The advertising invasion they suffer ends up being so suffocating that it leads to the payment model.

Technological volatility

Its form of IPO, called the listing model, is also questioned. Spotify put on sale that day, on April 3, 31% of the shares outstanding during its first day (55.7 million shares of the 178.1 million that it will have in total), when it reached a valuation of 26,500 millions of dollars. One of the consequences of this option is that the company does not have the support of the so-called consulting banks, which normally contribute to creating a market and setting prices. The absence of these actors in the IPO generates price uncertainties and greater volatility. The usual thing is for successful technology companies to take years to consolidate in the stock market. Between 2002 and 2008 Netflix did not manage to surpass the four dollars per action, in front of the 280 that are currently worth their titles, which takes its stock market capitalization to 120,000 million dollars.

The reasons for cautious optimism are that Spotify keeps growing and diversifying its offer. Another important fact is that he has managed to renegotiate his contracts with the record companies, which has reduced his cost over income to 78%. The goal is to achieve the Netflix ratios, which pay movie studios around 66% of their income.

Thanks to Spotify, the music industry has grown again since 2015. Large publishers already own 14% of the company’s capital. The fact that streaming today accounts for 65% of the industry’s revenues has been an undeniable achievement of the Swedish company, which since its existence has distributed nearly 10 billion dollars among record companies.


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