July 9, 2017    3 minute read

The Growth of Music Streaming: Is Spotify’s Valuation Correct?

Going Lossless    July 9, 2017    3 minute read

The Growth of Music Streaming: Is Spotify’s Valuation Correct?

The music industry, after years of tight straps, is beginning to breathe. From the latest data of the Recording Industry of America (RIAA), in 2016, US music sales generated $7.7bn (+11.4 % than the year before).

For the “disk” industry, this is the best sales data since 2009. The increase in sales is mainly explained by the growth of online streaming, which alone, in the US, is worth $3.9bn and now accounts for 51% of the music industry in the States.

Streaming is King

For the first year, digital music sales with streaming have surpassed the physical ones of CDs, which last year, for the first time since 1986, fell below $100m.

Purchases through downloads are also down (-22% to $ 1.8 billion). In short, music is sold through streaming services – a market dominated by Spotify. The Swedish company created in 2006 from the 34-year-old Daniel Ek has managed to break the competition of giants like Google, Amazon and Apple.

Spotify IPO

Spotify is preparing to land on Wall Street, between the end of the year and the first quarter of next year. It will do so with a direct listing to the New York Stock Exchange with investors who will be able to buy new shares directly on the market.

This is a form of “democratic” placement, somewhat unusual, with greater risk in terms of volatility, and with an equity valuation that has already reached $ 13 billion, following the recent agreement with Universal Music-Vivendi. Morgan Stanley, Goldman Sachs and Allen & Co. will follow the direct placement.

Everyone says Spotify has a good product and a great brand. Former US President Barack Obama, he used to announce his new Spotify playlist to the world every summer. The Swedish company landed in the States only in 2011 but its growth has been impressive.

Spotify’s Financials

A few days ago, the annual accounts were announced. A further step towards potential investors. Spotify has 140 million active users around the world. 50 million subscribers are automatically charged a fee (from $9) each month to access and download the endless music catalog offered by the company.

In 2016, Spotify had a turnover of $3.3bn, up 52% from the year before. However, costs have exceeded revenues. The company reported net losses of $600m, up from $257m in 2015. A worsened financial condition explained by an increase in the cost of debt – $1.1bn of convertible bonds placed last year – and by the effects of exchange rates between country and country.

The biggest costs for the company are those related to the payment of royalties to record companies. The more users click and the more Spotify pays. According to the company’s data, royalties and distribution costs represent 85% of Spotify’s revenues. To which 900 million dollars in labour costs (3,000 employees) of marketing and product development are added.

Growing Competition

Apple Music is the largest competitor of Spotify. It introduced streaming in subscription only two years ago, but has “only” 27 million subscribers. Pandora, another streaming music site that is trying to compete with Spotify and Apple Music, has just sold 19% of the property to the radio broadcaster SiriusXM in exchange for $480m. But Spotify remains dominant, with availability in 60 countries.

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