Spotify: Trading Stocks to the Beat of Their Own Drum
By Sydney Rosen
Sydney Rosen is an undergraduate student majoring in Marketing and minoring in Public Relations in the Eli Broad College of Business at Michigan State University.
Spotify (Sym: SPOT), a Swedish-based online music streaming service, issued its stock directly to the US investing public on Tuesday, April 3 rd. Although Spotify revolutionized the music industry with their innovative streaming service, the company finds itself today locked in a heated battle with Apple (Sym: AAPL) for dominance of the fast-growing audio streaming business.
Although Spotify continues to maintain its leadership position over Apple Music, the company’s decision to go public has enabled the public to learn a few interesting facts about its previously undisclosed finances - all of which raises questions about Spotify’s future value compared to Apple Music.
Apple Music, which launched in 2015, successfully reached over ten million subscribers in just six months – a threshold that took Spotify six years to reach after launching in 2008. However, at the beginning of 2018 Spotify reached 70 million paying subscribers. By comparison, Apple Music had a distance 30 million (at September 2017).
High subscriber count does not come without a price. The company’s recent IPO filing revealed growing net operating losses. These losses can be attributed to royalties the company must pay to record labels and music publishers every time a song is streamed. While the company’s revenue is growing by the billions, the fact that most of that money is put back into royalty payments means the company is not making any money.
Source: Google Finance
While it seems, the company would profit from charging users for premium subscriptions and running ads on free accounts, theringer.com reveals, “Spotify’s average revenue per paying user declined from $8.61 to $6.39 over the last two years”. This demonstrates that the platforms growing user base is not a direct solution to growing royalty payments. Fortunately for Spotify, the company closed a significant $1 billion round of debt funding in 2016. The deal gave large investors an option to convert debt into equity when Spotify went public.
Who’s Playing the Music Louder? Apple Music vs. Spotify.
Spotify’s revenue decline per user, is representative of its slow-moving user base. According to the Wall Street Journal, while Spotify is growing their user base in the U.S at a rate of 2% per month, Apple Music has a monthly growth rate of 5%. This could be a reflection of Apple’s fast track to the top of the music streaming industry.
Recently, Tim Cook, CEO of Apple revealed in an interview, “We’re not in it for the money. I think it’s important for artists. If we’re going to continue to have a great creative community, [artists] have to be funded”. These comments came as Spotify announced its public offering and followed criticism by artists about Spotify’s unreliable royalty payment system.
Unfortunately, Cook’s jab at Spotify was matched by Spotify’s mentioning of Apple as its less successful competitor more than a dozen times in their IPO paperwork. Spotify’s paperwork notes its current user base is “nearly double the scale of Apple Music”, potentially ending talk about Apple’s higher user growth rate.
However, it is hard to value Apple Music directly against Spotify for investing purposes because Apple chooses not to reveal financial information about Apple Music as a separate entity. All there is to compare is the huge gains Apple is making as a corporation versus the high costs Spotify is paying.
For now, it is difficult to say if Spotify is worthy of investment. In order to come close to profitability, Spotify needs to find a way to maintain low royalty payments while still satisfying artists. As the online music streaming industry grows larger it is necessary Spotify turns a profit in the next few years or they could fall victim to new entrants.