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Is Spotify the Next Big IPO Candidate for 2016?

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Launched in 2008 by entrepreneurs Daniel Ek and Martin Lorentzon, Stockholm, Sweden-based Spotify is one of the most popular streaming music services, allowing users to search or browse for free through music by artist, album, genre, playlist, or record label. There is also a paid “Premium” subscription for $9.99/month that removes advertisements and allows users to download music to listen to offline.
Spotify is available for download for desktops, tablets, and mobile devices.

Spotify recently announced that it now has 100 million monthly active users, with 30 million paying for the service, cementing its status as the leader in the increasingly crowded music streaming industry.

Controversies

Despite its popularity, Spotify has been plagued by negative publicity lately, mainly due to debates over their free advertising-supported service. This service allows people who are prepared to sit through occasional ads to listen to songs for free on demand.

Music labels—Spotify is in compliance with Sony, EMI, Warner Music Group, and Universal, among others—do not like the free service because it dismantles album sales, and pays less in royalties than the subscription does.

We all remember the Taylor Swift controversy. The popstar withdrew her entire catalog from the service, and in an interview withTime, argued for the “’inherent value placed on art,’” which she did not see happening on Spotify. Icelandic singer Bjork made her latest album Vulnicura unavailable on Spotify and other services, though her back catalogue remained available. And late last year, British songstress Adele similarly restricted her newest album 25 from all streaming services—you can currently listen to it on Spotify, along with her other albums, 19 and 21—on its release date, telling Time that "I believe music should be an event.”

Seeking Funding

Spotify’s most recent round of funding happened this past March, where the company raised $1 billion in convertible debt on the promise that its new investors will receive a 30% discount on shares when it files of an IPO; it’s 5% interest on the convertible debt will rise every six months by 1% until the company goes public.

Last year, Spotify closed a $526 million round of funding, putting itself at a valuation of roughly $8.53 billion, a move that showed investors its desire for expansion and new forms of content. The company announced a plan a few months before this funding round to add videos and podcasts from partners like ESPN, NBC, Comedy Central, and Conde Nast.

Spotify also closed funding rounds back in 2013, raising $250 million, and in 2012, when they raised $100 million. They have received investments from venture capital firms such as Technology Crossover Ventures, DST Global, and Kleiner Perkins Caufield & Byers.

The company’s decision to raise money through convertible debt was a smart move in order to maintain its high valuation, and doing so without diluting its existing shareholders.It also suggests that Spotify is seriously thinking about an IPO since the $1 billion funding round encourages the company to go public sooner rather than later.

With this new round of funding, Spotify is slowly edging out its competition: Pandora , Alphabet Inc.’s (GOOGL - Free Report) Google Play, Rido, and now Apple Inc. (AAPL - Free Report) , who has found major success with its Apple Music streaming service—thanks to a $3 billion deal with Beats that will incorporate the streaming service into its iTunes brand—and Tidal, rapper and mogul Jay Z’s emerging music streaming service.

Final Thoughts


Spotify’s most recent funding announcement is a tacit acknowledgement of the company’s rapid growth, universal reach, and readiness to start trading on the public market. Despite no official announcement to go public, one can view these business moves as preparation for their inevitable IPO.

2016’s IPO market is also improving after a very slow start, which is a good sign for Spotify. LINE Corp. (LN - Free Report) , the Japanese messaging app giant, debuted strongly on the NYSE, soaring 27% on its first day of trading, with investors declaring that the IPO rut is officially over. Other notable IPOs this year include Twilio Inc. (TWLO - Free Report) , U.S. Foods (USFD - Free Report) , and MGM Growth Properties (MGP - Free Report) .

Spotify’s impressive valuation and high popularity will work in their favor when the day comes for the company to go public. Patience is a virtue, fellow investors, so sit back, relax, and wait out Spotify’s expected public future.

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