Cloud storage company Dropbox is up 40% since it floated last month, but shares in Snap – the company behind social media app Snapchat – are down 15% compared with their float price. Recent technology floats have proved volatile and investors have been selling off shares in the wider sector, concerned by the prospect of greater regulation for tech firms such as Facebook. How have other recent tech floats performed? Spotify has already moved into podcasts and producing original music. One option would to be produce more original content, following the video shot for Spotify by Taylor Swift for her single Delicate. Analysts say it will have to diversify over time, to ensure that it stands apart from rival streaming services. The flotation will mark a new era for Spotify but it is not yet clear what changes the firm has planned. Spotify’s limited supplier base, with just four music companies controlling the rights to 87% of the music streamed on Spotify, is another risk, according to analysts at Hargreaves Lansdown. Both companies already provide hardware such as the iPhone and Amazon Echo which are available with their own, pre-loaded music-streaming services. Spotify is currently the market leader but tech giants such as Apple and Amazon have deep pockets and could cause some damage should they decide to mount a major challenge.
Simply put, it’s the potential for competition. One of the challenges will be persuading more non-paying customers to sign up for paid-for services. Meanwhile user numbers are expected to increase to 170 million this year, with paying subscribers expected to rise from 71 million to 90 million. With an estimated 40% share of the global music streaming market, Spotify is the dominant player in the sector, increasing its bargaining power with labels and artists over the royalties it pays them. Spotify has proved able to drive strong revenue growth, with revenues rising from €746m in 2013 to a predicted range of between €4.9bn and €5.3bn last year. A successful float will depend on whether or not investors believe Spotify’s claim that it can become profitable and fend off bigger rivals such as Apple and Amazon.
The company’s costs – including the royalties it pays to record labels and artists – are greater than its revenues, although that gap is narrowing. Investors will be weighing up the potential for growth against the fact Spotify has failed to turn a profit in its 12-year existence.
It is more difficult to predict than usual, because no advance price for the shares has been set. What is it worth?Īnalysts are predicting Spotify could be valued at $20bn-$25bn on its debut on the New York Stock Exchange but the reality is no one knows. By going public, Spotify’s strategy and performance will come under increased scrutiny, and investors will expect progress, fast. The flotation will help to fund expansion of the business, but it will also ramp up pressure on the management. The Spotify IPO will dispense with the bankers and go. Spotify made a commitment to its original investors that they would have the opportunity to cash in their investment, and this is it. The IPO Structure: Spotify Twists No Banks: In a typical IPO, the issuing company seeks out an investment bank, which not only sets an offering price (backed up by a guarantee) but also creates a syndicate with other banks to market the IPO, in roadshows and private client pitches.
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