On the morning of Spotify’s listing earlier this month, its founder Daniel Ek performed perhaps his most conventional act in a year-long journey to the public market: he went on a talk show.
It was his only press interview that day, as he had warned investors that he was not interested in the “pomp or circumstance” surrounding big tech flotations. After four minutes of waxing poetic on his upbringing and making amends with Taylor Swift — the singer removed her music from Spotify in 2014, before returning to the streaming service in 2017 — he was probed on a more enduring foe: Apple.
“Are you scared?” the hosts asked, citing reports that Apple’s music service is growing faster than Spotify’s. “We are about twice the size of them, so I think we’ve still got some room,” replied Mr Ek. “I’m very happy with the growth that we’re seeing.”
Spotify arrived on the public market with a $26.5bn valuation, even though the company does not make a profit. Investors are banking on its future growth — putting pressure on it to keep adding users at a blistering pace.
“[The listing] will definitely change public scrutiny of its metrics,” says Mark Mulligan, an analyst with Midia Research.
“Spotify has literally been able to report the way it wanted to in the past . . . no doubt they want to make sure they hit their projections.”
Spotify has made the FT 1000 list of fastest growing European companies for the second year running. Between 2013 and 2016, it increased revenues by 293 per cent.
It is the undisputed leader in streaming, with more subscribers than Apple and Amazon combined. But Spotify cannot afford to be complacent, with the Wall Street Journal reporting in February that Apple had cut its lead in the US. In the same month, Amazon told Billboard that it had attracted “tens of millions” of subscribers to its service.
In the weeks since going public, Spotify has unveiled a deal with Hulu, offering premium customers the video streaming company’s movie and TV catalogue alongside Spotify’s ad-free catalogue for an extra $3 a month. The discounted rate is intended to draw users to the premium service, which makes up the vast majority of its revenue.
Spotify also wants to bring more people to its free service, which bosses view as crucial to getting people acclimatised to the Spotify universe and later encouraging them to pay.
The company this month announced a new version of the free service. Last year, Spotify’s employees were required to use the free version of the app for a week to sample the experience. “It hadn’t really been updated since 2014,” says one employee, who requested anonymity.
Music streaming is an expensive business. Spotify pays royalties of more than 75 cents of every dollar it makes from piping music out to listeners. For Spotify to turn a profit in the long run, analysts and industry insiders believe it will have to look beyond music’s pricey royalty system.
It has aimed to promote podcasts and videos, from which the music labels do not earn a commission. This could boost advertising sales, which make up only a tenth of its turnover. In regulatory paperwork, it noted three times that the global radio advertising market is worth $28bn, making it a ripe opportunity.
Spotify and Apple have been battling over “exclusive” music videos, featuring stripped-down artist performances. Spotify has injected videos and short documentaries into its popular playlists, such as RapCaviar, reminding people that videos exist on the platform.
Another moneymaker could be to start charging artists or record labels for Spotify’s trove of data about how people consume music. Longer term, some industry watchers think it will start acting more like a record label — cutting out the middleman.
Analysts are bullish: RBC’s Mark Mahaney estimates the potential for 3bn smartphones worldwide could leave Spotify aiming at a $125bn market, in which its brand and data give it the edge. Life on the stock market means the mood music will be easier to judge.
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