Is Spotify Worth An $8B IPO?

Spotify’s goal, according to recent reports based on the accounts of unnamed insiders, is to go public in the second half of 2017. By metrics, the firm is a tremendous success — by the numbers, it is the most successful music streaming service in the world with the most paid subscribers. Many have tried (Tidal, for example) but no startup has succeeded as well as Spotify. Its real competition comes from giants such as Apple and Amazon.

But there’s just one problem. Spotify, after a decade in business, is still not making any money.

“This is just a tough sector, and that is skepticism Spotify will have to overcome,” says Mark Mahaney, an analyst with RBC Capital Markets.

Spotify has 30 million paying customers and reported sales of $2.2 billion. But it also has some very expensive contracts to pay out to the music industry — totaling $1.8 billion last year alone, according to public filings. Record labels — and in particular, the big three: Universal, Sony and Warner — take home about half of Spotify’s sales.

Spotify has tried to negotiate those rates down, mostly to no avail, as the labels counter that Spotify is already paying a sub-market rate.

But the situation is tricky. Labels are stakeholders in Spotify, and just pulling down their music isn’t a live option given the 10 percent or so it kicks into a label’s total revenue.

But Spotify needs a deal in place before it can IPO, and the firm’s last billion dollar funding round included terms that allow investors to convert their stakes into shares at a 20 percent discount to the IPO price. That discount grows overtime.

There is also talk that Spotify, with its entrenched music fan base, can branch out into other areas of entertainment and content build around videos.