Launched in 2008 by entrepreneurs Daniel Ek and Martin Lorentzon, Stockholm, Sweden-based Spotify is one of the most popular streaming services on the market today. With its desktop and mobile app version, the company allows users to search or browse, for free, through its extensive music library. Spotify also offers a “Premium” subscription for $9.99 per month that removes advertisements and lets users download music to listen to offline.
Spotify recently announced that it now has 100 million monthly active users, with 50 million paying for the service. This achievement has cemented its status as the biggest subscription music service by user count, and the leader in the increasingly crowded music streaming industry.
Arguably Spotify’s biggest market rival is Apple’s (AAPL - Free Report) Apple Music. Launched in 2015, Apple Music is a streaming music service based on Beats Music, which has drawn listeners with playlists made by experts, not algorithms. The service is also known for its collaborations with high-profile musicians like Drake and Taylor Swift. It costs $9.99 per month, and users can download music from an extensive digital library, just like Spotify. Apple Music offers listeners a free, three-month initial trial.
There’s also Tidal, the Scandinavian streaming service that rapper and mogul Jay Z scooped up back in 2015 for $56 million. It has a similar price of $9.99 per month for normal streaming, while also offering a $19.99 per month option that includes high-fidelity sound quality. Like Apple Music, Tidal is known for its partnerships with big music names. Rihanna, Beyoncé, and Kanye West all exclusively debuted their latest albums on Tidal before a wider release.
Other top rivals include Rdio, which provides access to online radio stations, with different levels of on-demand access, for $3.99 to $9.99 per month; Pandora (P - Free Report) , one of the original internet radio companies, goes for $4.99 per month to avoid ads; Rhapsody, the original streaming music subscription service, has been around since 2001, and is available for $9.99 per month; and Alphabet Inc.’s (GOOGL - Free Report) Google Play Music, which offers online music storage and a streaming service for $9.99 per month.
Despite its popularity, Spotify tends to draw out negative publicity, mainly over debates about its 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 (SNE - Free Report) , EMI, Warner Music Group, and Universal, among others—understandably dislike the free service because it dismantles album sales, and pays less in royalties than the subscription does.
We all remember Spotify’s battle with Taylor Swift. The popstar withdrew her entire catalog from the service because she “didn’t like the way it felt. I think there should be an inherent value placed on art. I didn’t see that happening, perception-wise, when I put my music on Spotify,” she said in an interview with Time.
Other musicians soon followed in her footsteps. Icelandic singer Björk made her latest album Vulnicura unavailable on Spotify and other streaming services, though her back catalogue remained available. And in 2015, British songstress Adele similarly restricted her Grammy-winning album 25 from all streaming services—however, 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.”
Last year, Spotify was embroiled in issues surrounding its updated Terms and Conditions of Use, where in a blog post, the company’s user communications manager Candace Katz explains “We may ask for customer permission to collect information from new sources, such as address book, location, and sensor data [and photos, voice controls, and contacts] from the mobile device to improve the customer experience and inform product decisions."
An IPO on the Horizon?
Over the past few years or so, Spotify has been on the hunt for new funding. The company closed funding rounds in 2012 and 2013, raising $100 million and $250 million, respectively. In 2016, Spotify completed a whopping $526 million round of funding, putting it at a valuation of roughly $8.5 billion, a move that showed investors its desire for expansion and new forms of content—a few months before this funding round, Spotify announced its plan to add videos and podcasts from partners like ESPN, NBC, Comedy Central, and Condé Nast.
And about a year ago, 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 for an IPO. Spotify will have to pay 5% annual interest on the debt, however, and 1% more every six months, up to a total of 10%, until it goes public.
This decision to raise money through convertible debt was a smart move, as Spotify was able to maintain its high valuation without diluting its existing shareholders. It does suggest the company is seriously thinking about an IPO, since the latest round of funding encourages Spotify to go public sooner rather than later.
Or, at least, that’s what was originally thought. According to TechCrunch, Spotify is apparently considering delaying its IPO to 2018, with sources saying the company wants to use the time to “build a better balance sheet and work on shifting its business model to improve its margins.” But in reality, the delay is likely linked to Spotify’s inability to finalize new licensing deals with the big record labels like Universal, Sony, and Warner, whom control 80% of recorded music.
There’s no doubt about Spotify’s rapid growth and universal reach, but it remains unprofitable mostly because of the fees paid to these music labels. The company supposedly pays a royalty rate of 55% of its sales, and is fighting to pay less. Nevertheless, its impressive valuation—a TechCrunch source hopes to target a valuation between $11 billion and $13 billion--and popularity will work in their favor when their public debut comes. Patience is a virtue, fellow investor, so sit back, relax, and wait for Spotify’s exciting future.
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