Spotify, the world’s leading music streaming platform, filed for direct listing on the New York Stock Exchange yesterday, February 28. In an unconventional move, the company has decided to forego a traditional IPO in favour of a route that will let its employees and investors sell shares on the market without the company raising any capital or incurring underwriting costs from hiring a Wall Street broker or company. There is no listing price mentioned in the filing since the company will not issue any new shares as part of the listing.
Spotify AB, the Swedish startup behind the service, was founded in April 2006, and the platform itself officially launched in 2008. Since then, the platform’s reach has grown steadily, and it currently boasts more than 140 million monthly active users (MAUs), including over 70 million paying subscribers (as of January 2018). This puts it far ahead of its competition in the music streaming space in terms of monetisation – second-placed Apple Music has about 36 million paying subscribers, little more than half. According to Spotify’s filing, the company posted €4.1 billion (about US$5 billion) in revenue in 2017, but still posted a net loss of €1.24 billion (about US$ 1.5 billion) – the company has yet to turn profitable in operations.
Spotify has been the subject of much criticism since its launch, with many artists and musicians accusing the platform of driving an unsustainable model of compensation. Spotify pays royalties based on “market share” or the number of times a song is streamed on the platform as a proportion of the total number of streams. Spotify pays labels and music rights holders who then pay artists as per their individual agreements. Spotify has responded to criticism saying that its freemium model helps reduce music piracy by encouraging users to try out the free platform before upgrading to paid subscriptions.
According to Spotify’s filing, the company’s shares have traded as high as $132.50 per share in private markets, which would place its valuation at over $23 billion. Direct listings do not dilute ownership in companies, unlike traditional IPOs, and can also save hundreds of millions of dollars in underwriting fees, making them lucrative for companies like Spotify that might not have the extra cash lying around. However, it also allows employees and stakeholders to start trading immediately and exposes the stock to market volatility right off the bat, making it a proposal fraught with risk.
Spotify’s official statement about the filing says, “As this listing is taking place via a novel process that is not an underwritten initial public offering, there will be no book building process and no price at which underwriters initially sold shares to the public to help inform efficient price discovery with respect to the opening trades on the NYSE. Pursuant to NYSE Rules, we have engaged Morgan Stanley & Co. LLC (“Morgan Stanley”) as a financial advisor to be available to consult with the designated market maker (the “DMM”) in setting the opening public price of our ordinary shares on the NYSE. Based on information provided by the NYSE, the opening public price of our ordinary shares on the NYSE will be determined by buy- and sell-orders collected by the NYSE from broker-dealers and the NYSE is where buy orders can be matched with sell orders at a single price.” There is no official timeline or date set for the listing as yet – the company said that it would proceed with the listing “as soon as practicable after this registration statement is declared effective.”
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