Spotify Goes Non-IPO: What Does It Mean?

    At the end of February, the largest streaming service in the world Spotify applied for an IPO. Bidding will be open on April 3. The company aims to raise $ 1 billion. Spotify’s entry into the public market was not a surprise, but analysts were surprised by the way they raised funds.

    The transition to public status is already called a “non-IPO."

    What this means and how it will affect subscribers and shareholders is discussed below. Photo / CC

    IPO without IPO

    Now Spotify is a private company, its shares are owned by a limited circle of people. The largest shareholders of the service are its founders - Daniel Ek (Daniel Ek) and Martin Lorentzon (Martin Lorentzon).

    In addition, Tancent, a Chinese company with which Spotify exchanged shares in December , is among the shareholders ; Tiger Globe, one of the largest hedge funds in the world; the three major US record companies - Sony Music Entertainment (SME), Universal Music Group (UMG) and Warner Music Group (WMG); Technology Crossover Ventures venture fund and a number of other individuals and legal entities. According to Billboard, amid news of upcoming trading, stocks have risen in price by 25% over the past three months.

    An IPO allows companies to sell their shares publicly and raise funds from a wide range of investors. As a rule, an investment bank, for example, Morgan Stanley, participates in the initial public offering of companies - it organizes an IPO. Such a bank is called an underwriter. He attracts major investors, acts as a guarantor of the placement of securities, for which he receives remuneration from the issuer.

    The traditional IPO has an alternative - direct listing . This is a simplified and less expensive exchange procedure for startups without an underwriter. This unusual way to become a public company and chose Spotify management. The company's shares will be offered directly to investors. In this case, Spotify will not actually releasenew stocks. Instead, the company will permit stocks held by investors and employees on the New York Stock Exchange.

    At the same time, banks will not attract potential buyers of shares. However, investment organizations Morgan Stanley, Goldman Sachs and Allen & Co will advise on the project. Direct listing also means that Spotify will sell shares without a set initial price (underwriters are responsible for it in the case of a “classic IPO”). Pxhere / CC


    The main drawback of direct listing is the lack of support or guarantee of share buyback from large investors. Under the traditional IPO, banks organize the attraction of the main pool of buyers, control the volatility of stock prices during and after listing - in other words, they do not allow IPOs to fail.

    Spotify management has already warned that trading "may be unstable," and the stock price may "fall significantly and quickly." Underwriters insure against such uncertainty at a public auction, buying up shares and preventing them from sagging much in price. On the other hand, there is no guarantee that existing shareholders will start selling their shares, but will not want to hold them - this can save Spotify shares from a sharp fall and without the help of an underwriter.

    The main advantage of direct listing is cost savings . Banks receive money as consultants, and not as bidders - for the company, this format of IPO is much cheaper.

    Bidding is expected to open in late March or April and is predicted to become the technology’s largest IPO this year. At the beginning of March, the company's value is estimated at $ 23 billion.

    Why Spotify Publicity

    The business model of the service is based on paid subscriptions - they bring the company the main profit. Spotify today has 71 million paid subscribers with a 2% monthly increase . This is twice as much as the nearest competitor of the service - Apple Music. Thanks to this, Spotify manages to increase revenue for the third year in a row . In 2015, it amounted to $ 2.37 billion, in 2016 - $ 3.6 billion and $ 4.99 billion - in 2017.

    Despite the successes, Spotify ended the year 2017 with a loss of $ 1.5 billion. I recall the story of another long-lived music startup - SoundCloud, which almost went bankrupt last year due to a series of losses. Because of this, by the way, he could become propertySpotify, but the deal did not take place.

    By the way, another similarity of companies is the common problems with paying royalties. For streaming tracks, the streaming service is obligated to transfer fees to the holders of copyright and exclusive rights - to performers and labels. As of December 2017, the company paid $ 9.76 billion in royalties, but this did not save Spotify from major lawsuits.

    In 2016, the company had to transfer $ 21 million to the National Association of Music Publishers for unpaid royalties. In 2017, the service was forced to pay over $ 48 million to settle a similar dispute with several small publishers. Earlier this year, $ 1.6 billion was filed against Spotify for copyright infringement.

    In addition, in January, the U.S. Copyright Council decided to increase the size of royalties, and over the next five years the volume of deductions from streaming services will grow by 44%. All this is noted in the Risk Factors section of the IPO application.

    Spotify, after 10 years of existence, is still at a growth stage, but external factors jeopardize the company's business model. Therefore, direct listing may be the way out for a service that wants to avoid the fate of SoundCloud and cover its losses.

    Who is affected by the non-IPO Spotify

    Exit Spotify on the stock exchange will affect not only the company and its shareholders, but also those market participants who are not directly related to the service. First of all, these are traders - the forecast that Spotify stocks can make sharp jumps attracts them with the opportunity to earn.

    Record companies and artists can also benefit from upcoming sales. The three largest labels - UMG, SME, WMG - each have a 5% stake in Spotify. And they all plan to share the proceeds from the sale of company shares with their artists.

    Spotify trading has indirectly affected ordinary listeners. In March, it became known that the service began to combat pirated applications that allow you to listen to music for free and without ads. The company threatened to blockusers of illegal applications that help circumvent service restrictions. This step is associated with preparation for bidding - the company needs to convince shareholders of the absence of any problems.

    Direct listing of Spotify will be closely watched by other technology companies preparing for the IPO. The future of this model depends on the success or failure of unusual trading - it will confirm either its performance or market concerns.

    By the way, Spotify is not the only example of a music project entering the stock exchange. For example, a company owning the rights to Eminem’s tracks recently entered a mini-IPO, and the singer’s royalties became an analogue of shares (we talked about this case in more detail here ).

    Announcing the date and details of the upcoming auction, the service head Daniel Ek also mentioned Spotify entering new markets - therefore, in the near future, the service will not only conduct an IPO, but will also be available in India, South Africa and Russia .

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