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Spotify's Public Offering: Can Streams Make Profits?



Spotify is Going Public

It's been reported by Danny Vena of Motely Fool that the music streaming company Spotify has filed registration documents with the Securities and Exchange Commission (SEC) to go public. Spotify becoming a publicly traded company has been rumored to happen for a while now, but instead of pursuing an Initial Public Offering (IPO), Spotify will look to do a Direct Public Offering (DPO).

What's a DPO and Why a DPO?

In a DPO the company offers its shares directly to the public to raise capital, eliminating the middle men and the cost associated with an IPO. The middlemen in this case would be the investment banks and underwriters, who charge millions of dollars to bring a company public. Along with the cost savings a DPO allows the company to choose from a wider base of potential investors. While a large investment bank would be able to offer shares to some of its wealthiest clients, with a DPO Spotify would be able to offer shares to anyone willing to pay the offering price. In a DPO the issuer - Spotify - would set the offering price and minimum investment per investor. A DPO will also prevent the dilution of existing Spotify shares held by insiders or early investors in Spotify. With a DPO the insiders and early Spotify investors will be able to sell their shares immediately. With an IPO there is a waiting period that restricts the immediate sale by insiders and early investors upon the company going public.

Is Going Public The Right Thing to do Now?

In the first half of 2017 music streaming revenue was $2.5 billion, which was a 48% increase when compared to the first half of 2016. Streaming is growing in popularity and Spotify has taken advantage of the way the public now consumes music. Spotify is the largest music streaming service when measured by users and paid subscribers. In 2016 the company's revenue was just under $3.3 billion which represents a 52% increase over 2015 revenue. Spotify's 2016 revenue represents almost half of the $7.9 billion collected by music streaming services in 2015. That is an impressive feat for a company competing against Apple Music (Apple, AAPL), Google Play (Google, GOOGL), Amazon Music, Amazon Unlimited (Amazon, AMZN), and Tidal. But as fast as Spotify's revenue is growing so are the companies losses. In 2016 the company lost $600 million and in 2015 the company lost $258 million. Then there is the debt. In 2016 the company raised $1.5 billion in debt and convertible notes. It's the that debt that may have Spotify ready to make a public offering. The convertible notes of that $1.5 billion allows the investors to convert bonds in to shares at a 20% discount according to an endgadget report. After a year, if an offering doesn't happen, 2.5% is tacked on to the discount every 6 months, and of course there is still the interest to pay on the debt.


Chart by Statista

The current investment climate may be perfect for a company like Spotify to go public. Investors are prioritizing user/subscriber growth and market share over profits, which would definitely benefit a company like Spotify. But one day investors will look for profits and when that day comes will Spotify have profits or a plan to show?

Thoughts on Spotify as a Public Company

I have my reservations about a Spotify offering. I question if a company doing only music streaming can be a profitable company. Of the names mentioned earlier, Apple, Google, Amazon, and Tidal, Tidal is the only other strictly streaming service. Apple, Google, and Amazon have other parts to their businesses. Can a company strictly dedicated to music streaming be consistently profitable?

Pure Speculation of the Music Streaming Business

Spotify, Napster, and Tidal are all bait for bigger media companies. I believe Netflix will purchase a music streaming service and rebrand it. Netflix will also purchase a music identification company like Soundhound. Netflix at this time seems like the most logical name to couple it's already existing service with a music streaming company. This is all speculation of course.

Conclusion

Spotify's filing still needs to be approved by the SEC. We will continue to monitor Spotify and the news around the company for more information.

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