Spotify’s Move Into The Public Sector

After many years of uncertainty through the digital era, the major labels are finally in a position to prosper, thanks to Spotify’s move to go public. The online music-streaming giant, which has 159 million monthly listeners and 73 million paid subscribers, is now listed on the New York Stock Exchange and has been somewhat successful with its transition to being a public entity thus far.

Spotify’s debut on the stock exchange was generally a success, opening at a price of $165.90 per share giving the streaming service a market cap just under $30 billion, nearly four times the company’s valuation as of its last round of funding. The IPO had the fortunes of Spotify’s founders and investors skyrocketing, however it is unclear whether Spotify customers and artists who have supported the service for all these years will see any kind of payoff.

The IPO

Remarkably, rather than selling new shares to institutional investors just before the stock can be purchased by the public, Spotify instead chose to list its existing shares directly on the New York Stock Exchange. This move to sell directly to the market also means that rather than selling shares to institutional investors in advance of the first day of trading (which is what normally happens in an IPO), Spotify didn’t sell any new shares. It instead allowed its existing shareholders to directly offer their holdings to the market. This meant that company insiders are not required to hold onto their shares for an extended period of time in the way that they would normally be required. So, someone like, for example, CEO Daniel Ek could sell his shares at any time.

Furthermore, Spotify’s public offering is not only notable because of this unusual decision, but also because the stock ranked among the most valuable internet companies to list in the US. Spotify is also the most valuable tech IPO since Snap went public last year, closing its first day at nearly $29 billion. Its closing market value after the first day was approximately $27 billion, putting it ahead of Twitter and Groupon, but behind Alibaba, Facebook, Snap and Google following their first trading days.

Along with the major labels, big holders of Spotify stock include the investing firms Tiger Global, TCV and the Chinese conglomerate Tencent. Each of these companies control between five and ten percent of the stock. However, it is particularly hard to tell how much money some investors made as Spotify grew because it has had such a broad history of private stock sales between shareholders. It is difficult to tell if a certain firm sold or bought shares secretly many years ago, so it is challenging to track the winners and losers in this IPO.

How Does This Effect the Listeners?

Last year, Spotify struck a series of licensing deals specifically in preparation for going public, and in a major concession, it announced that it would allow some artists to restrict new albums to paying subscribers for the first two weeks of release. Major labels and big-name artists have been pushing to restrict the release of new albums from being played on Spotify’s free tier for a long time.

This idea comes from the simple concept that music should be paid for, given that most of the record industry’s streaming revenues come from subscriptions. The inability to limit music to paid tiers was the deal breaker between Taylor Swift and Spotify in 2014, who along with other big names like Adele and Coldplay have kept new music back from all of Spotify for various lengths of time as well.

Now with new pressure to meet shareholders’ and investors’ demands, Spotify will likely begin to explore other methods of generating revenue. One proposal is selling their data to live concert companies, which would likely bring privacy concerns to attention. Another idea is offering more services to labels and musicians, such as expanding on its existing “Spotify for Artists” app.

Also notable are Spotify’s steps into other fan-facing business areas. A partnership with a band merchandise provider called Merchbar already allows artists to sell merch through their pages on the Spotify app. Spotify has also moved into podcasts and video, and more recently, audiobooks. There could potentially be a step into hardware with Spotify-branded smart speakers, similar to the Amazon Echo. Whatever notable changes the streaming service makes it will hopefully enhance the Spotify users experience and also benefit artists.

How Does This Effect the Artists?

At this point in time, the only way that it is obvious that artists may be affected by the IPO is second hand through their record labels. All three major labels have assured the public that they will give a portion of the money from the IPO to their artists, but there have been several reports that artists are yet to be informed of any payment procedures. There is no doubt that the labels could use the injection of cash, but it is also important that they keep the interests of the artists on their rosters in mind.

In its beginning stages, Spotify was able to get funding from the three major record labels, but since going public, Warner Music Group has sold 75 percent of its Spotify shares for about $400 million. Warner CEO Steve Cooper announced this during the company’s earnings call and made it clear that the sale doesn’t reflect any doubt about Spotify’s potential. Cooper has recently expressed that Warner’s primary focus is on music and not publicly traded equity, but it is still not clear what Warner plans on doing with the $400 million. Warner emphasized that it was the first major music company to announce that it would share proceeds with artists from the sale of equity in digital services.

Conclusion

No matter the path Spotify takes, the future looks to be more in the direction of the online video-streaming services like Netflix and Hulu. Something that has become common place with these services is producing much of their own content thereby lowering licensing payments. This would be a difficult path for Spotify to take because it risks distancing record labels by acting too much like one itself. But it seems that we could very possibly see Spotify taking steps towards this in the future.

Furthermore, going public and filing quarterly earnings reports will shine a light on how much Spotify executives and shareholders actually earn compared to the company’s long-criticized payouts to artists. With the added financial transparency, underpaid artists should have plenty more reasons to object, and perhaps quietly seek out alternatives. But they’ll be going up against the new establishment. Increased tensions between creator and seller seem like a minor side effect, but musicians who aren’t part of the industry’s commercial elite already have enough reasons to feel rejected by Spotify. In its early stages of being a public company, Spotify executives have made little clear about what they plan on doing going forward, but it will be curious to see Spotify develop in the public market.

Bibliography

Aswad, Jem. “Warner Music Group Sells 75% of Its Spotify Shares.” Variety, Variety, 7 May 2018, variety.com/2018/biz/news/warner-music-group-sells-75-of-its-spotify-shares-1202800953/.

O’Malley Greenburg, Zack. “Spotify Goes Public At $30 Billion; When Will Artists See Any Of That?” Forbes, Forbes Magazine, 3 Apr. 2018, www.forbes.com/sites/zackomalleygreenburg/2018/04/03/spotify-ipo-goes-public-at-30-billion-when-will-artists-see-any-of-that/#3a58c6dc37b0.

Hogan, Marc. “What Spotify Going Public Could Mean for Music Fans.” Pitchfork, Pitchfork, 8 Jan. 2018, pitchfork.com/thepitch/what-spotify-going-public-could-mean-for-music-fans/.

Ingham, Tim. “Warner Has Sold $400m of Spotify Stock – and Says It Will Share Money with Artists and Label Partners.” Music Business Worldwide, 7 May 2018, www.musicbusinessworldwide.com/warner-has-sold-400m-of-spotify-stock-and-says-it-will-share-the-money-with-artists-and-labels/.

Schleifer, Theodore. “This Is Who Benefits Most from the Spotify IPO.” Recode, Recode, 4 Apr. 2018, www.recode.net/2018/4/4/17197630/spotify-ipo-winners-stock-billion-daniel-ek.

Molla, Rani. “At $27 Billion, Spotify Is the Seventh-Most-Valuable Internet Company to Go Public in the U.S.” Recode, Recode, 3 Apr. 2018, www.recode.net/2018/4/3/17193594/spotify-ipo-price-stock-wall-street-market.

Schleifer, Theodore, and Rani Molla. “Spotify’s First Day of Trading Ended up Being Surprisingly Normal – and That’s a Win for the Direct Listing.” Recode, Recode, 3 Apr. 2018, www.recode.net/2018/4/3/17194006/spotify-ipo-direct-listing-first-day

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