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The Millennial’s Guide To The Spotify IPO

Insights Say What Series Next Generation Investment Basics

Spotify, the decade-old startup darling that’s been both lauded as the savior of the music industry and cautioned as its potential downfall, is listing its shares today (April 3) on the New York Stock Exchange in an unorthodox initial public offering that won’t raise new money, but could usher the music-streaming service into the echelon of tech giants.

“Arguably the most anticipated day in the history of digital music is upon us,” writes Mark Mulligan, a top industry analyst who runs the firm Midia Research.

According to Stockpile, an investment site, the people most excited about Spotify’s market debut are millennials, or those aged 18 to 36. They haven’t shown this much interest in an IPO since Snapchat went public a year ago. It makes sense, as 72% of Spotify’s listeners are millennials. But will they embrace Spotify’s shares as easily as they embraced the company’s streaming service? And should they?

How is Spotify making its public debut?

Spotify is breaking all the rules. With a direct listing on the NYSE, the company won’t raise additional capital, but it will give existing shareholders a chance to cash out quickly if they want.

Company leaders aren’t even coming to NYSE for the hallowed tradition of ringing the opening bell, according to the Wall Street Journal (paywall); CEO Daniel Ek claimed last month that “for us, going public has never been about the pomp or circumstance.”

Because Spotify didn’t go the traditional route of hiring banks to organize a pre-IPO roadshow and to underwrite the offering, there’s more uncertainty than usual about how this first day of trading will go. Two firms—Morgan Stanley and Citadel Securities—are helping to determine the optimal price for Spotify’s shares to balance out interest from buyers and sellers. For a closer look at the mechanisms behind this odd IPO-not-IPO, see Quartz’s breakdown of what the Spotify IPO means for Wall Street.

What will the shares be worth?

That’s up to the market to determine. But the paperwork that Spotify filed with the US Securities and Exchange Commission last month does say what its shares have been traded for on the private market, which we can look to as a reference. The latest figures, for January and February 2018, are in a range between $90 and $132.50. The latest pre-sale estimates indicate the stock will open at $150 to $160 a share(paywall).

What happens if today goes well?

Only a handful of companies have chosen to go public via direct listings. Spotify is the largest among them. A successful opening day will likely draw more interest in direct listings from fellow Silicon Valley startups. For Spotify itself, it would mean a more stable image, perhaps a more favorable negotiating position with labels and artists, and—most importantly—more publicity and support for its signature “freemium” (free and subscription tiers) business model, which has been repeatedly attacked by a disgruntled industry struggling to compete with it.

What does it mean for Spotify lovers?

Nothing, yet. The direct listing doesn’t give Spotify more money, so users won’t suddenly see a boom in new features.

But a successful IPO means Spotify could cement itself—and its freemium business model—as the leader in the music-streaming industry. Spotify has been selling its free tier to investors as a conversion tool for getting people to sign up for the subscription tier (which makes more money and keeps labels and artists happy), so you can expect the free tier to remain while the subscription tier might get much more enticing with new features and offerings.

“People are getting more comfortable paying for online subscriptions. I think it’s working,” says Richard Kowalski, manager of industry and business intelligence at the Consumer Technology Association, which estimates that US consumers will spend $6.6. billion on music streaming services alone in 2018. The company projects that spending on streaming services, both audio and visual, will grow 35% to $19.5 billion.

Kowalski adds: “Music enthusiasts are investing their time and effort to build playlists, add favorites, customize the service. The engagement can lead to someone who wants to turn off ads and enjoy offline listening. They’re ready. They’re not going to jump to another service, because they’ve put all this time and effort in.”

What does it mean for artists?

Spotify claims its aim is to “unlock the potential of human creativity by giving a million creative artists the opportunity to live off their art.”

Musicians have their doubts. Taylor Swift, Adele, and Thom Yorke are among those who’ve aired public complaints about Spotify, and specifically its payout rates to artists. “Spotify’s nine billion and they ain’t say (crap)—Lucy, you got some ‘plainin’ to do,” Jay-Z once rapped, calling out Spotify’s then-$9-billion valuation contrasted against its unprofitability.

The negotiations behind Spotify’s payouts are complex and individually tailored. But a Spotify IPO is broadly good news for musicians. Major record labels all have equity in the company and stand to make billions of dollars from the IPO if it’s successful, and they have promised, albeit vaguely, to share that windfall with their artists.

So, is Spotify going to be the Netflix of music?

Not really. Kowalski says it’s unfair to make a comparison between music streaming and video streaming, which involves entirely different systems for licensing and acquiring content.

But it’s worth noting that Spotify’s offering is also being led by Barry McCarthy, the executive who previously took Netflix public. While the situation and industry are different this time, McCarthy’s similarly daring tactics and presentations to investors in the last month have made people wonder if Spotify might share the breadth of Netflix’s ambitions. Midia’s Mulligan, for one, predicts that Spotify will “take a subtler path” to becoming the Netflix of the music industry, first by becoming a profitable direct platform for artists, then later on competing with record labels to sign artists itself.


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Article taken directly from here.