Is Spotify really worth $23bn?

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Image caption Daniel Ek co-founded Swedish streaming company Spotify in 2006

Spotify, the world’s biggest music streaming service, has filed paperwork to start trading its shares publicly on the New York Stock Exchange.

The firm said it expects shares to sell at prices that could value the business at more than $23bn (£16.7bn).

The Swedish company will list shares directly on the NYSE, bypassing the traditional stock offering process.

In a typical public offering, companies issue new shares, with the initial price underwritten by investment banks.

With a direct listing, current Spotify shareholders will take their shares straight to the market.

The move provides an exit for early investors looking to cash in on the company’s growth, but is not intended to help the business raise significant new money.

“It’s about a company that is letting its investors get their returns so it can move on to the next stage of its career,” said Mark Mulligan, a UK-based music industry analyst at MIDiA Research.

Spotify, which launched its streaming service in 2008, is now active in 61 countries, boasting 159 million monthly active users and 71 million paid subscribers.

Analysis: North America technology reporter Dave Lee

The fact that Spotify exists at all is something of a minor miracle: unknown Swedish company convinces major record labels to upload millions upon millions of songs for people to listen to without buying them. It must have been quite the pitch.

Sure, the labels get royalties but it’s pennies – fractions of pennies – on what they used to get from “traditional” online sales.

Regardless, it’s been clear for a long time that streaming is the music industry’s future.

On Wednesday, Spotify announced it would go public – but that’s not to say its here to stay. The company has long been surrounded by threats, and it’s no different today.

Apple, Amazon and Google are all in the music streaming game, all with direct hardware with which to serve its users music. Spotify doesn’t.

And while Spotify has signed deals with all the “big three” record labels – Warner, Universal and Sony – it’s the music executives that still hold the bargaining chips.

Read more from Dave Lee here

Calculating value

Spotify said its shares sold for between $37.50 and $125 each in private transactions last year and more than $132 this year. The company’s potential valuation is based on a combination of stock price and how many shares it has outstanding.

The prices shared by Spotify suggest a range of $6.3bn to more than $23bn.

The higher figure would make Spotify one of the biggest public debuts of a tech company since 2012, said Kathleen Smith, principal at Renaissance Capital, which provides institutional research and manages exchange traded funds focused on new public companies.

She cautioned, however, that private investors have tended to value firms more highly than public markets in recent years.

Snap, owner of Snapchat, for example also had an almost $30bn market capitalisation after its first day of trading last year, but it has struggled to sustain that figure.

“This could be an issue – could it possibly sustain those valuations?” she said.

Image caption UK pop star Dua Lipa was one of Spotify’s most-streamed artists this year

In its filing with the Securities and Exchange Commission, Spotify said it has incurred operating losses since its inception and experienced more than €1.2bn in losses in 2017.

But other key metrics, including revenue, are moving in the right direction, Mr Mulligan said.

The firm earned €4bn in revenue last year, rising almost 40% from €2.95bn in 2016, according to the filing.

Europe is its largest region, with 58 million monthly active users, followed by North America. It is also making inroads in Latin America and other parts of the world.

Churn rates, which measure cancellation, have fallen, while the time spent using the service has increased.

“All of that stuff paint a really strong story to investors that they’re on the right path,” Mr Mulligan said.

Future plans

In its filing, Spotify says it aims to “unlock the potential of human creativity by giving a million creative artists the opportunity to live off their art and billions of fans the opportunity to enjoy and be inspired by these creators.”

The firm said it had paid more than €8bn in royalties to artists, music labels, and publishers since its launch.

The filing also hinted at plans to expand beyond music into other forms of radio.

“With our ad-supported service, we believe there is a large opportunity to grow users and gain market share from traditional terrestrial radio,” it said.

The filing says the firm expects to sell $1bn worth in shares, but the figure is a placeholder used to calculate the registration fee. The document does not provide information about when the listing would occur.

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