Spotify could delay IPO until 2018

The world’s largest music streaming service, Spotify, looks like it may delay its initial public offering (IPO) until 2018.

With 100 million users and 40 million subscribers in 60 markets, the Swedish firm looked like the most likely of the streamers to go to the market, rumoured to take place this September.

After all, by last September, 103.1 million music fans were paying to stream and with more coming on board each day as services offer more features. In 2016, escalating streaming revenue helped the majors achieve more profit than ever before.

However, multiple sources have told TechCrunch that Spotify is considering whether to wait another year. The reasons are varied, but they all amount to making the company more appealing to the financial markets. Spotify is growing rapidly but it hasn’t made money after ten years of operating – and carries a debt of over US$1 billion.

In its latest available figures taken in 2015, revenues nearly doubled to US $2.1 billion while losses grew 10% to US$186.6 million.

Spotify wants a valuation between US$11 billion and US$13 billion before the IPO, up from its current US$8 billion.

To this end, it has been hiring financially-savvy executives. Co-Founder Martin Lorentzon stepped down as Chairman in October 2016. Co-Founder and CEO Daniel Ek took over to put affairs in order.

To focus on its problems, Spotify abandoned plans to buy SoundCloud. An IPO delay would give it more time to shift its business model and build up profits.

With its market lead in music streaming, the company needs to re-negotiate with record labels where it could go for a fixed price rather than a varying pricing model depending on how many times a track is played.

Last September, Spotify claimed to have paid out in total US$5 billion to music rights holders on a 70% to 72% deal for its 30 million tracks.

Deals vary from territory to territory, but record labels and artists generally get about 55% and music publishers and songwriters pocket 15%.

Talks have not begun as yet. The major labels say Spotify’s payment rates are not that impressive anyway. But senior label executives have also signalled that unless they help services like Spotify survive, they’ll be left with streaming services which are part of mammoth empires like Apple, Google, Amazon and Microsoft, and which can cut harder deals.

Certainly, Wall Street indicates that 2017 is the year that Spotify may go bankrupt unless it changes its business model.

Spotify has declined to comment to the latest speculation.

“Three to five years ago, you could have an IPO based solely on user growth and promises of the future,” one source told TechCrunch.

“But the financial climate has changed now. Today you have to show some path to profitability, especially at the valuation that Spotify has been targeting.

“That may have caught up with the company a bit.”

Spotify may also decide to wait to see what the climate for tech IPOs is when Snapchat’s parent Snap Inc goes public in March to raise US$3 billion.

The California-based Snapchat is so popular with teenagers that it is now worth US$20 billion to US$25 billion. However, Snap’s finances are messy: last year it lost US$515 million on revenue of US$404 million.

Spotify will wait to see if investors are still willing to be flexible with Snapchat.

Already it may be worried that Pandora’s listing launched in 2011 with $16 per share and now dropped to $13 and has a current market valuation of $3 billion.

But can Spotify afford to delay?

Its loan raising in the past 12 months have been pegged to synchronise with the timing of a public offering. Last year when it raised $500 million and $1 billion in two lots, the service locked in some potentially onerous deals if the IPO didn’t take place in 2017.

The proviso was that if the IPO happened within a year of the investment, investors would get a 17.5% discount on shares.

If it was more than a year away, the discount will increase 2.5 percentage points every six months on the original 5%.

Investors TPG and Dragoneer Investment Group can convert their debt to equity at a 20% discount of whatever share price Spotify sets for an eventual IPO. If Spotify didn’t IPO within a year, that discount goes up 2.5% every extra six months. That’s on top of the 5% annual interest Spotify would pay on the debt, and 1% more every six months up to a total of 10%.

These, apparently, are also in play. “If you have the user growth and feel secure enough to negotiate in other areas, why would you rush an IPO?” a source told TechCrunch.

In any case, Spotify’s IPO will come under much scrutiny when it happens.

MiDia Research founder Mark Mulligan advised Billboard, "Spotify’s IPO will have a bigger impact at the industry level than any other company in any other major industry.

"If successful, you’ll see an influx of capital, new services and -revenue for labels, publishers, artists and songwriters. If not, you’ll see potential investments fall through and -questions about the model. Successful or not, it will shape the market."