Instead, investors will be applying forensic scrutiny to Spotify’s user and revenue metrics. The upshot of all this is that during its first year as a public company, those narratives are unlikely to be enough. Meanwhile, it will need to have other new less disruptive revenue streams to spin narratives around, such as selling data to music industry stakeholders. In effect, subtly reversing into becoming a label. The news today that Spotify has acquired online music and audio recording studio Soundtrap – reportedly for $30 million – fits this thinking. Spotify ‘ becoming a label’ will be highly disruptive so it will have to do it slowly and in non-obvious ways. Spotify without Universal Music would swiftly wither on the vine. For example, Disney recently announced it was pulling its content, but Netflix continues to go from strength-to-strength. Netflix can get away with this because there are many TV networks so no single one can kill the service by removing its content.
Netflix has set a strong precedent for how to drive net margin with a 70% rights cost case (like Spotify’s) by creating its own content and using accounting technique, such as amortization of costs, to turn cost into profit on the books. Sustained strong growth in subscribers, users and revenueĪll except the first could prove contentious, as many of the solutions will be inherently challenging for record label partners.I’ve written before about how Spotify will need to construct a number of new narratives for life as a public company. The only problem is, Wall Street often has very high expectations for growth stage tech stocks, and falling short of those expectations can result in a tumbling stock price, even if the growth trend is actually solid.
Spotify’s currently challenged underlying financials are not going to change in any fundamental sense over the course of nine to 12 months, so it will need to construct a series of narratives and targets that Wall Street will buy into. Note my careful use of the words ‘well-received earnings’, not ‘strong earnings’. Posting three or four successive quarters of well-received earnings will be key to Spotify’s life as a public company. The music industry will be watching with keen interest as it is going to be the bellwether for the streaming music sector. With a fair wind, Spotify’s long-anticipated public offering should happen before the end of Q2 2018 (and yes, probably a direct listing rather than an IPO but 'IPO' worked better in the title!).