Why Spotify’s IPO Should Scare the Sh*t Out of You

So, Spotify is finally pulling the trigger on their IPO — well, sort of. It’s a direct listing but by the time you read this, the company should be listed on the NYSE as $SPOT. Now that they will be publicly traded, music journalists must be a bit more careful in what they say about the company, and that includes me. Let’s start here: I’m not a shareholder, nor do I plan to purchase any shares privately or publicly of common or preferred shares. I’m a premium subscriber, and have been since the first month they launched in the U.S.; and lastly, I am not a stock expert and nothing written here should be seen as financial advice.

There, disclaimer satisfied.

Now, let’s get into it. If you are just a casual fan who loves their streaming service and are amazed by having all of the world’s songs (mostly), in your pocket, for free or just $9.99/mo, don’t worry just yet. The worst that may happen to you is a) the free tier will most likely disappear and b) premium pricing will rise by at least 50%, but neither will happen immediately.

However, if you’re considering investing, or are a participating rights holder on Spotify’s platform (artist, label, publisher, songwriter), you should be scared sh*tless. Let me tell you why.

First, understand why companies do traditional initial public offerings (IPOs). It’s meant to be an exit for founders and first investors, a way for them finally to become actual millionaires and billionaires with the public’s money, not just rich on paper. Other reasons range from raising money at more attractive rates rather than floating more debt, creating an acquisition target mark for valuation, to overall company awareness.

Here’s where it gets murky. One reason for a direct listing instead of a traditional IPO is that no bank will take your company public. Meaning, your valuation and future is too risky to set a market rate. Spotify has been rumored to go public since 2014 — Google it. There is a reason why they haven’t, there’s a reason why they went trolling for money last December from Tencent.  Here’s another reason: current shareholder equity doesn’t become diluted.

Blah. Blah. Blah. This isn’t about stocks. I just want you to understand Spotify is not your average IPO; this isn’t Facebook going public. Spotify is not here to save the music industry. They are here to make billions, and billionaires. What they are doing is hoping that you, as a music lover (and musician), and your Mom and your Uncle who love Spotify, will buy stock in them, because major institutions sure as hell won’t. There is no lockup, meaning that current shareholders (except Tencent) can unload their shares.

Here are just a few reasons why you need to be worried.

THE BUSINESS MODEL

If Spotify went bankrupt tomorrow, there is nothing to sell. A bunch of Macs, some T-shirts, and an algorithm. That’s it. The business is dependent on paying licensing fees yearly. The company reported revenue of $4.99 billion last year, but just like every year in its existence, Spotify did not make a profit in any quarter, and in fact, lost $1.5 billion in 2017. The only reason they didn’t lose more is because they negotiated lower royalty rates with major labels which also own a piece of the company. That means the regular rights holders get paid less, so that the labels get their nut. And this is the most dangerous part. The only way they can make money is by paying us all less than we are due. But, major labels’ profit has been rising from Spotify payouts overall as they participated in killing physical sales, so they don’t give AF about the ecosystem.

PUBLIC COMPANIES MUST PERFORM HYPER-GROWTH EVERY QUARTER FOR SHAREHOLDERS

What can Spotify do to drive growth unless they open a label themselves? Fire people? Raise prices?

VIDEO

I asked a Q on Twitter, “What was the last video you saw on Spotify?” The number one answer was “Spotify has video?” Exactly. Do you get your podcasts through Spotify? Probably not. Will you buy merch? Probably not. How about this new rumored hardware solution? Chances are you already have Alexa or something like it.

LAWSUITS

The company faces a $1.6 billion lawsuit from Wixen Music Publishing.

SUBS DROP

If fake click-streams are ever addressed, subs will drop, so will the stock.

SHADY PLAYLISTING

Music from UMG, SME, WMG, and Merlin accounts for 87% of all streams. If you aren’t on those labels, you probably aren’t getting equal access streams.

I will follow up on this article as things develop. And now, I will go hit my Daily Mix on Spotify!

ABOUT THE AUTHOR

Michael St. James is the founder and creative director of St. James Media, specializing in music licensing, publishing, production and artist development.

photo courtesy of www.bestaiassistant.com/siri/hi-siri-hey-siri-talk-siri/

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