The news that music streaming giant Spotify has filed to go public in the first half of 2018 is reverberating through the music industry, leaving its rivals either terrified or under pressure to spend a lot more to compete. The move is a milestone given that Spotify is the first stand-alone streaming business to go public–even though it’s not preparing for a traditional IPO but is readying its stock to be publicly traded through a direct listing. Spotify’s filing also signals continued growth and confidence for the battered music business, which has only recently begun to see a resurgence in large part due to Spotify and other streaming companies.
But the decision to go public, a shot across the bow, leaves some clear winners and losers in the streaming space going forward, and it raises questions about Spotify’s strategy for the future–beyond paying back investors.
With over 140 million active users–60 million of which pay for a monthly subscription–Spotify has long been the dominant player in streaming, with Apple Music (30 million subscribers) and Amazon (16 million) distant rivals. Then there are the smaller, independent companies like SoundCloud, Tidal, and Deezer. Even with a recent $1.6 billon copyright lawsuit, and criticism that its financial losses are growing almost as quickly as its revenue, which hit $3.3 billion in 2016, Spotify remains the streaming service to beat.
As a public company, analysts predict that Spotify’s lead will only grow stronger and will put pressure on Apple and Amazon to dig into their deep war chests. As diversified conglomerates whose main revenue streams come from, respectively, hardware and e-commerce, Apple and Amazon have always had far more resources at their disposal than Spotify. But with a valuation of $20 billion, Spotify’s IPO “will bring them cash, so they can continue to compete meaningfully,” says Chris Carey, CEO of Media Insight Consulting. “That could be a real threat” to Apple and Amazon.
Carey and others predict that Spotify will use its new resources to continue to invest in companies that help it improve its relationship with users and their tastes through things like algorithmically determined playlists and suggested artists and tracks. In 2017, Spotify went on an acquisition spree, gobbling up companies like Soundtrap, an online music studio; and the TV recommendation platform MightyTV. And in 2014, Spotify bought the music discovery platform Echo Nest for $100 million.
“They’ve not been shy about buying things that are valuable,” Carey says. “Echo Nest was a fantastic move for them. Its understanding of music is the underpinning for Discovery Weekly,” one of Spotify’s most popular features. “That’s the kind of investment I seem them keeping on making. Investment into better curation, better understanding of music, and better ways to serve that up to their audience.”
Mark Mulligan, managing director of MIDiA Research, points out that even with an IPO Spotify will still not be able to match Apple or Amazon’s deep pockets, but that it “will give itself that extra bit of resource to even the odds a little. It will force them to spend more to keep up with the pacesetter’s pace.”
As for the smaller streaming services, many of which have been forced to raise funding recently, analysts say they will likely be acquired by larger, better capitalized companies—perhaps even by Spotify. “SoundCloud, Tidal and Deezer are wrestling with business models that are under pressure from larger players like Spotify, Pandora and Apple,” says David Golden, managing partner of Revolution Ventures. “It’s hard to see how they avoid inevitable consolidation to build scale. Once Spotify has a publicly-traded stock, it may serve as an acquisition currency to allow them acquire one or more of the smaller players.”
And then there are the major record labels, which Spotify negotiated important deals with leading up to its IPO filing. Analysts say they’re both winners and losers. As investors, they’ll get a payday from the IPO. But if down the line Spotify decides to offer its own stock on the market, a bigger balance sheet will mean more negotiating power with the labels.
But according to Carey, the biggest winner of all is the music streaming industry as a whole. “In the big picture, this is about to be a significant influx of money into the music tech space, which has probably been under-invested in in the last couple of years because people had their fingers burned a couple of times. CloudMix was a very public flop–lots of money was spent for a product that never got off the ground.
“Music was perceived as unbelievably risky,” Carey goes on. “So to suddenly have excitement about a music transaction and to see money flowing into a music company that has worked very hard for a very long while now to get to where it’s gotten–I think this is quite exciting. I think the proven return we’re about to see could be a very good headline to kick-start a very good year for the music industry.”