Spotify is poised to make its stock market debut on Tuesday, in a flotation on the New York Stock Exchange that could value the company at $20bn-$25bn (£14.2bn to £17.8bn) according to analysts.
The music streaming business was launched 12 years ago as a free-to-use service, funded by advertising. Spotify now has 157 million customers, and has managed to convert 71 million of those into paying users of its premium subscription service.
However, Spotify has never made a profit, making it more tricky for potential investors to value the firm. It also counts the likes of Apple and Amazon as competitors, a daunting prospect given the depth of their pockets.
Here are some of the key questions as the Swedish firm prepares to go public.
What is different about this flotation?
Unlike most companies that float, Spotify is not issuing any new stock, which means it has not set a price for its shares in advance. Instead it is selling shares currently held by its private investors, rather than handling it in the usual way with the process managed by investment bankers. It will save the Swedish company money but it is likely to create volatility when the shares go live on Wall street (14:30 BST) as investors try to settle on a price. The company has made losses of nearly €1bn (£870m) over the past three years, so investors will not be able to rely on a traditional price earnings ratio as a guide.
Why does Spotify want to float?
Spotify made a commitment to its original investors that they would have the opportunity to cash in their investment, and this is it. The flotation will help to fund expansion of the business, but it will also ramp up pressure on the management. By going public, Spotify’s strategy and performance will come under increased scrutiny, and investors will expect progress, fast.
What is it worth?
Analysts 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. It is more difficult to predict than usual, because no advance price for the shares has been set. Investors will be weighing up the potential for growth against the fact Spotify has failed to turn a profit in its 12-year existence. The company’s costs – including the royalties it pays to record labels and artists – are greater than its revenues, although that gap is narrowing. 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.
What are Spotify’s strengths?
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. 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. Meanwhile user numbers are expected to increase to 170 million this year, with paying subscribers expected to rise from 71 million to 90 million. One of the challenges will be persuading more non-paying customers to sign up for paid-for services.
What are the threats?
Simply put, it’s the potential for competition. 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. Both companies already provide hardware such as the iPhone and Amazon Echo which are available with their own, pre-loaded music-streaming services. 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.
What will it mean for consumers?
The flotation will mark a new era for Spotify but it is not yet clear what changes the firm has planned. Analysts say it will have to diversify over time, to ensure that it stands apart from rival streaming services. One option would to be produce more original content, following the video shot for Spotify by Taylor Swift for her single Delicate. Spotify has already moved into podcasts and producing original music.
How have other recent tech floats performed?
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. 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.