The world may love the services they provide, but the new generation of tech companies haven’t found much love on Wall Street recently. Spotify, the leading music streaming service, is hoping to change that with a share sale could lead another round of “unicorns” to try their luck on the US stock markets.
Founded 11 years ago in Sweden by Daniel Ek, 34, Spotify currently has more than 100m monthly active users, of which 50m are paying subscribers. A successful debut for Spotify, valued at least $8.5bn, will officially crown streaming as the future of the music industry.
The company’s closest rival, Apple Music, counts 20 million paying users; Tidal, fronted by the rap superstar Jay Z, a little over one million. Amazon and Google are also in the game, with Facebook a likely entrant.
Ek, a serial entrepreneur who started his first company at age 14, owns a stake in Spotify valued at $1.8bn. But while he will leave this share sale a rich man, streaming will probably never make the sort of money for the music industry that CDs and vinyl did. Even so, after more than 15 years of disruption that kicked off with industry revenues eviscerated by illegal peer-to-peer file-sharing, the music business is currently celebrating its second straight year of growth.
In 2016, streaming revenue increased 60%, while the overall global music industry grew 5.9% – the fastest rate of growth since 1997. According to a global music report issued by the industry group IFPI, music revenues hit $15.7bn in 2016, up from $14.8bn in 2015. Fifty per cent of that came from digital sales.
A Goldman Sachs research note, Music in the Air, projects that streaming will help revenues double to $104bn by 2030.
The industry’s begrudging acceptance of technology has proved its salvation.
“This is the triumphant return of innovation,” says Les Borsai, music-tech entrepreneur behind the business-facing music platform SongLily. Instead of fighting consumer preferences, the labels “have come around to realizing that consumer demand for innovation drives the business”.
“It’s not so long since we had to walk into Virgin Records to buy the physical product. Back then, we thought people would hate losing that experience. Download kills retail, but that becomes archaic. So we go to the streaming model that gives instant gratification, which is now the model for everything.”
As recently as three years ago, artists were still sharing their doubts that music subscription services would ever be widely accepted. Taylor Swift pulled her music from Spotify in 2014. She later explained she was “not willing to contribute my life’s work to an experiment”.
But significant hurdles remain. One is Google-owned YouTube, which dominates music streaming with a free, ad-supported model. While YouTube points to $1bn it paid back to the industry in advertising last year, payments to artists have not kept pace.
Part of the issue, says Greg Barnes, general counsel of the Digital Media Association, is that copyright laws have lagged behind technology. “We want to make it easier to licence vast quantities of songs in an efficient manner. We need to make the system more efficient and more transparent.”
While it may be hard to imagine a time when one hit single could sell 18m copies of a Twisted Sister album, today’s numbers are nonetheless impressive. Take the Canadian rapper Drake: last year, Spotify streamed his songs more than 4.7bn times.
But music label executives also urge caution. They note that neither Spotify or its rivals have reported a profit. Cary Sherman, CEO of the music industry’s US trade group, noted in a blogpost that the improvement in revenues “does not erase 15 years of declines, or continuing uncertainty about the future”.
Ek is listening. Last week, Spotify announced it had added four new board members, including the former Walt Disney chief operating officer Tom Staggs; Shishir Mehrotra, YouTube’s former head of product; Padmasree Warrior, who heads of the US unit of the Chinese electric auto firm NextEV; and Cristina Stenbeck of the Swedish investment firm Kinnevik.
The appointment of Staggs, a 26-year veteran of Disney, was widely interpreted to signal that Spotify is looking to enter into the video-streaming market. The company previously added Netflix’s chief content officer, Ted Sarandos, to the board.
It may not just be streaming that Spotify makes mainstream. The company is considering a direct listing on the New York Stock Exchange (NYSE), an unusual tactic that avoids millions in underwriting fees and could help attract other tech unicorns – companies valued at over $1bn – to follow suit.
Tech companies have traditionally favoured an initial public offering (IPO) in which the company offers investors shares before it goes public. A direct listing only allows investors to buy shares through the open market. The move saves a fortune in fees but also – potentially – makes the sale highly volatile as long-term investors, like pension funds, who could have bought into the pre-sale of an IPO, will only decide whether to buy in once shares start trading.
If approved, the Swedish streaming service could go public later this year, marking the first tech listing since the disappointing launch of Snap Inc, which lost $2bn in value after releasing disappointing results earlier this month.
If the IPO is successful, other hot startups, such as Airbnb and Uber, could follow swiftly in Spotify’s wake.