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Why Spotify’s Unusual Business Move Is Capturing Headlines

If you know Daniel Ek, the Swedish-born CEO of Spotify, then you’re not surprised that he is making news for taking an unconventional path. He started his own business designing and building websites at age 14, and by age 18 he was managing a team of 25 programmers. He sold his online marketing company Advertigo in 2006 for about $1.25 million. He was 23. He actually took some time off from the business world in his 20s, choosing to party and drive a red Ferrari, but he wasn’t fueling his passion, just spending money. Spotify launched soon after, born from the two things that mattered most to Ek: technology and music.

Spotify and Ek are currently capturing all the business headlines. The world’s largest music streaming service went public last week in a very unusual way. It didn’t use investment bankers. It didn’t sell any of the company’s own shares — some existing shareholders chose to sell their stock instead. It live-streamed the investment presentation to the public instead of giving access only to Wall Street analysts. When trading on its stock commenced, no Spotify executive rang the bell on the New York Stock Exchange. CEO Daniel Ek never mingled with traders on the floor and did not give interviews to TV reporters.

And Spotify is proud of doing it this way. “For us, going public [has] never really been about the pomp or the circumstance of it all. So you won’t see us ringing any bells or throwing any parties,” said Ek during an investment presentation that the company held last month. He has also pointed out that the company is not raising capital, which is one of the reasons that many companies go public. “This is because I think the traditional model of taking a company public just isn’t a very good fit for us.” Eschewing middlemen, Spotify chose to go public using a “direct listing” instead of an initial public offering. “We want to be as transparent as possible and give everyone equal access to information about the company,” he said.

When a company first issues shares to the public on stock market, it begins with an initial public offering – an opening price for the stock. An IPO helps a company determine how much the stock is worth at that particular moment, and it allows the company to raise needed capital for expansion or other projects. It is also an opportunity for people in the company who own private shares to finally cash in and make some money.

In an IPO, investment banks underwrite the offering — shares to be offered by the company for sale — and act as intermediaries between the firm and the public. They shop the stock around to institutional investors such as pension funds to gauge demand and set the IPO price. These investors get first dibs on shares; the participation of a larger pool of investors increases liquidity. But in a direct listing, a company lists its stock directly with an exchange without investment banks. And while it isn’t selling shares, the listing lets existing shareholders sell stock publicly.

“We don’t see [direct listings] too often,” said Wharton adjunct finance professor David Wessels.  He noted that Spotify chose not to raise any money in going public, unlike other big tech names. “The big reason for this is because although their gross margins are relatively low and their profitability is an issue, they are cash-flow positive. So it wasn’t as if they were burning through cash and desperately needed the markets to fund them.”

However, one big down side of direct listings is that on the first day of trading the stock could jump around sharply without underwriters smoothing out the trading as the market searches for price equilibrium. That is why normally “there’s going to be a lot of volatility around those first few trades,” Wessels said.

But that did not happen with Spotify, said Jay Ritter, eminent scholar in finance at the University of Florida and former Wharton finance professor. He and Wessels recently discussed the listing on the Knowledge@Wharton show, which airs on SiriusXM channel 111.

Threat to Wall Street?

On April 3, Spotify opened at $165.90 a share and ended its first trading day down 10% to $149.01 for a $26.5 billion valuation. Its intraday high was $169 and the low was $148.26 — a 14% spread, about the same percentage for Alibaba and Twitter when they had their IPOs, Ritter said. When LinkedIn went public in 2011, the high intraday price was more than 50% above the low. “So Spotify, in spite of the lack of book building and investment bankers placing shares, had volatility … on the low side of what is typical with prominent tech company IPOs,” he noted.

The relatively low volatility was remarkable since only about 5.6 million shares exchanged hands at the stock’s opening price, according to Bloomberg News. The first day of trading ended with a volume of more than 30 million. If other large companies were to follow Spotify’s example — or take the Dutch auction route that Google chose when it went public 14 years ago — investment banks have to watch out. “With auctions and the direct listings, underwriters don’t have the ability to allocate shares to their favorite customers. And that’s actually the most profitable part of book building for underwriters,” Ritter said.

Ritter believes it’s “very possible” for other tech unicorns (visit the related KWHS stories tab to find out what these are) to follow the same path as Spotify — Pinterest, Airbnb, Lyft, Uber and others. Since they are well known, “they don’t have to devote a lot of effort to educating investors about what the company is involved with.” And a big perk is they also will be saving a lot of money. These companies “might find this direct listing approach very attractive in that going public is very costly,” he said.

But Wessels thinks Spotify will be a “very volatile” stock going forward because it is buffeted on two fronts. It has to contend with powerful rivals such as Apple Music, Google Play Music and Amazon Prime Music, which could decide to pump billions of dollars into their music business to fight Spotify. Ganging up on the other side are major music labels such as Universal Music Group, Sony Music Entertainment and Warner Music Group, upon which Spotify depends and which could potentially ink a contract with a Spotify rival. “What if they change their mind [about access]?” Wessels said. “What if they want to sign an exclusive contract with Apple and will no longer allow their music to be played on Spotify unless Spotify pays certain kinds of fees?”

Apple, Google and Amazon

Spotify’s Ek is aware of the constant comparisons to his big rivals, especially Apple and Amazon. But he said the company’s music focus is its strength. “We’re not focused on selling hardware. We’re not focused on selling books,” he said at the investor presentation. “We’re focused on music and connecting artists with fans. I think that in itself is a huge business. Nobody else has more than 3,000 employees focused on just this one thing. Nobody else has this global scale that we’ve already built.”

Spotify streams to 65 countries and territories, with 157 million monthly active users (MAU) of which 71 million are paying customers, according to the prospectus filed with the Securities and Exchange Commission. It has nearly double the number of paying subscribers as its closest competitor — Apple Music, which has 38 million. Spotify offers a free ad-supported service and an ad-free version costing $4.99 a month for students, $9.99 for individuals and $14.99 for six accounts in a family plan.

A key advantage for Spotify is that it streams on many platforms: Apple iPhones, Google Android devices, Amazon, Tesla, Facebook, Twitter and others whereas Apple Music is only available on iOS devices, and Google Play Music is for Android gadgets. “We have more than 250 partners that help make Spotify a service you can use on pretty much any connected device,” said Gustav Soderstrom, chief research and development officer at Spotify, during the investor presentation. He said more than 75% of its paying customers listen to Spotify on multiple devices.

As for dealing with music labels, Ek said Spotify’s goal is not to take advantage of the industry through disruption but to grow together. He said the platform seeks to serve both listeners and artists. Through the app, artists can talk to fans directly, sell concert merchandise or invite superfans to special events, among other ways of connecting with their audience. Artists can also discover useful information, such as which songs are gaining traction and which are skipped. For example, rock band Metallica used Spotify data to choose songs to play as they go on tour.

“Some people say Spotify is disrupting the music industry,” Ek said. “We’re really just part of the evolution of the music industry. We don’t want to replace anyone. We want to make everyone better, more efficient and have more impact.” Ek called this focus on music fans and more than 3 million artists as its “two-sided marketplace.” The company reported that through the end of 2017, it has paid nearly $10 billion in royalties to artists, music labels and publishers.

These hefty royalties, however, have cut into profits. Spotify continues to incur net losses despite posting a compound annual growth rate (CAGR) of 45%, according to its SEC filing. In 2017, it posted annual revenue of 4.1 billion euros, up from 2.9 billion euros a year earlier, but net loss was 1.2 billion euros and 539 million euros, respectively. But it had positive free cash flow as well in both years — which excludes noncash items such as depreciation that are included in the net loss figure.

For now, listener growth remains robust, if moderating a bit. In the fourth quarter of 2017, monthly active users increased by 27.6% from the same period a year earlier. But that was down from 35% in the last quarter of 2016 compared to 2015. But Ek said there’s more growth opportunities ahead: It has not yet entered big markets such as India and Africa. And it is getting exposure to China through its investment in Tencent Music. Spotify is now offering podcasts and videos as well.

After more than a decade in business, Spotify has grown into a big company, Ek said. But it is aiming to grow even bigger. He is convinced there are more opportunities ahead, as only 12% of payment-enabled smartphones in Spotify’s 65 countries and territories are using its app today. “We’re just in the second inning of this game,” he said. “We’re just getting started.

Conversation Starters

What is a direct listing and how is it different than an initial public offering?

What's your perspective on the live-streaming music battle? Which service do you prefer and why?

How would you describe Ek as a CEO? What does he prioritize? Where does he fit into the evolution of the music industry? How is he driving it?

16 thoughts on “Why Spotify’s Unusual Business Move Is Capturing Headlines

  1. A direct listing is aimed at a larger market than a traditional IPO, as it seeks to involve many traders to buy and sell Spotify’s stock to prop up its price. An initial public offering has traditionally been the choice of many large companies for several reasons: it allows company insiders to buy shares and helps the company’s image on the market.

    Under Ek’s leadership, neither of the two factors are important. His company insiders already own shares, and its position as market leader is generally established. Having established his company’s image, the future of the music industry is his next most important concern. He uses his position in the streaming-radio market to help artists and bands connect with their fans, and help artists establish themselves to like-minded viewers. Ek puts Spotify’s data to good use and shares it with music companies, which then use it to decide future albums or even

    Personally, I prefer Amazon Music over Spotify. The selection of music is more limited (in some genres), but it is more comprehensive. It also allows offline downloads, so one can utilize the service even if no Internet connection is available.

  2. The live-streaming music battle can be a tough one. There are a amazing amount of sites that can give you the music you want to listen too on the spot. The battle can be rough because there is a limited amount of product and all the sites have to offer all of the same product. The ways companies win these wars is by giving benefits and extra things with this service. I use and prefer Spotify. I use their app because of many reasons. For starters, Spotify is relatively cheap and the premium membership has a lot of good benefits. With premium you can listen to whatever music you want whenever you want. Also they let you download the music which gives you more freedom to listen to it where ever. And last but not least, they have good playlist, mixes, podcast, and radios that you can enjoy if you don’t know what to listen to specifically.

  3. 1. Direct listing is when smaller companies or startups that want to do a public listing may not have the resources to pay the high costs to underwriters, or don’t want to. Initial public offering is a company’s flotation on the stock exchange.

    2. I believe live-streaming is a smart and useful tool because it allows people o have their music wherever and whenever they want. I personally use Spotify and I love that is allows me to download any songs I want and have them with me whenever.

    3. Ek prioritizes bringing music in the best way to all of is customers. He uses his business to help the music industry and help artists reach their fans. He can be considered a market leader as his company continues to excel.

  4. 1. Direct listing involves smaller companies that look to work in public listings. However, the problem with these small companies is that they may not already have the ability to; due to resource issues. On the other hand, initial public offering is a choice for larger companies for purchasing shares and helping how they perceive themselves to others on the market.

    2. My perspective on the live-streaming music battle is that there is a bunch of options posed by the variety of companies that are out there. This allows for better offers for the consumers; in which we are benefitting from the fierce competition. The service I prefer is Spotify. This is because I enjoy how easy it is to use; and the best aspect about it is by buying Spotify Premium, it doesn’t take up data. The ease of downloading the music to use whenever and wherever is the best.

    3. Ek as a CEO is one who looks to bring music to all the consumers. Ek should be seen as a leader in the market with Spotify, because Spotify is improving more and more rather than staying the same.

  5. 1.) A direct listing, a company labels its stock directly with a transaction without investment banks. And while it isn’t selling shares, the listing lets current holders sell stock to the general public. Initial public offering is usually for companies on a grander scale who choose to display their company to others through stock exchange and shares.

    2.) Live streaming is a very popular service whether it’s for T.V. and movies or it’s for music. It allows for consumers to evaluate different sources, experiences and offers. I for one use Spotify and Apple music, however prefer Spotify for its ease of use and customizable display.

    3.) Ek is a very smart and focused CEO, due to his perspective of focusing only on his brand and nothing else. He is very committed to music and technology making this drive even more enjoyable for him. He prioritizes music and music only, as it is his strong point. His flexibility in the music industry makes him a very strong evolutionary character, as he aims for public use, a strong source for cross-platform streaming, and many other goals he has set for the company.

  6. 1. A direct listing is when smaller companies want to work with public listings but may not have the necessary resources to do so. While an initial public offering allows company insiders to buy shares, and promote the company’s image. This is why many companies chose to go with an initial public offering.
    2. I believe that the live streaming music battle is one based on which companies can offer the most user-friendly services. There is a large amount of competition but I personally prefer using Spotify. In comparison to other services such as Pandora and Amazon music, Spotify combines both the use of radio stations and personal playlists and music.
    3. Ek as the CEO of Spotify uses his passion and love for music to create a strong company with large improvement seen over the years. He uses his position to help the artists and the music industry in general.

  7. A direct listing is when small companies want to be public but sometimes don’t have the money to do so.

    My opinion on the live-streaming music battle is that there shouldnt be a battle. Music should be cheap and thats it. As for what service I perfer I like to use apple music because it has the lyrics. Spotify got rid of its lyric system there for turning me away.

    Ek as the CEO of spotify puts the customers first. He creates a strong company with a large amount of daily users based on his passion for music.

  8. A direct listing is aimed at a larger market than a traditional IPO, as it seeks to involve many traders to buy and sell Spotify’s stock to prop up its price. An initial public offering has traditionally been the choice of many large companies for several reasons: it allows company insiders to buy shares and helps the company’s image on the market.

    Under Ek’s leadership, neither of the two factors are important. His company insiders already own shares, and its position as market leader is generally established. Having established his company’s image, the future of the music industry is his next most important concern. He uses his position in the streaming-radio market to help artists and bands connect with their fans, and help artists establish themselves to like-minded viewers. Ek puts Spotify’s data to good use and shares it with music companies, which then use it to decide future albums or even

    Personally, I prefer Amazon Music over Spotify. The selection of music is more limited (in some genres), but it is more comprehensive. It also allows offline downloads, so one can utilize the service even if no Internet connection is available.

  9. A direct listing is an opportunity for smaller corporations to go public by allowing current stockholders to sell their shares to the public without the backing of an investment bank. Initial public offer (IPO) has been the more traditional method for larger corporations to sell their shares on the stock exchange as it allows the company to raise capital for further investment in the company.

    The live-streaming music battle has been evolving for decades. Early streaming services such as Napster paved the way for more modern and developed services such as Apple Music and Spotify. I believe the two biggest competitors in the market are Apple Music and Spotify due to their wide audience and far reach. In order to get the competitive edge in the market, companies must find a way to add a distinguishing feature to their service as to provide a competitive edge. I personally prefer Spotify due to its multiplatform compatibility and easy interface.

    Ek is an ambitious and focused CEO. He prioritizes the people and the artists over profits and margins. This makes him a key player in the evolution of the music industry as he is revolutionizing the music industry and the way we listen to music through creating new and innovate features.

  10. 1. A direct listing is aimed at a much larger market than a traditional IPO. It wants to involve many traders to buy and sell Spotify’s stock to bring up its price. An initial public offering is usually the choice of many large companies.

    2. My perspective on the live-streaming music battle is that steaming is and amazing choice because it allows people to listen to their kind of music wherever and whenever they want to. I prefer Spotify because it has the most up- to-date music, it is free, although there is premium. While other apps and music streaming companys want you to pay a membership or per song.

    3. I would describe Ek as a CEO dream seeking, ambitious, and very focused. He prioritizes the people and the music artists. He fit into the evolution of the music industry by completely changing and making it better in the way we view and listen to music today. He drives it very well as he is constantly trying to make it better.

  11. The administration heading Spotify is making a risky move by going public. Especially as such a huge company, such a monumental move could end well or end badly. As a company, Spotify has to be sure that it is continually outshining its competitors such as Apple and Amazon. If they lose the upper hand, not only is this inherently bad for them, but it could also mean that a record label or music producer may choose to affiliate itself with one of Spotify’s competitors. As a company whose goal is to “connect with its fans and their love of music,” further placement of limitations on Spotify’s collective library of music could cost them customers. In the media business, the goal of a company must be to strive to provide the best possible service to consumers, outshining its competition. I believe that by putting the customers first, Spotify can come out on top in the music streaming business.

  12. My opinion on the live stream music battle is that it has been evolving and getting more competitive over the years. The live stream music is such a good idea and I have been using Spotify for over a year now and I love it. Spotify had become such a daily thing for me that my family and I bought the family premium pack which allows us to stream music anywhere at anytime for a cheaper price than other streaming platforms.
    A direct listing is when a smaller company wants to do a lot of public listings but they just don’t have the money or resources to do it. It is also aimed at a larger market than the original IPO. It involves and try’s to sell or buy spotify’s stocks to make the price higher.
    I would describe Ek as a great CEO he is a dream chaser that made it and is really ambitious. He created something spectacular and wants to get everyone involved including the listeners and the artists. He definitely started a new wave and has changed the way we listen to music in a good way.

  13. A direct listing means that it is an opportunity for smaller corporations to go public by allowing current stockholders to sell their shares to the public without the backing of an investment bank. Initial public offer has been the more traditional method for larger corporations to sell their shares on the stock exchange as it allows the company to raise capital for further investment in the company.

    The live-streaming music battle has been heating up for years. Early streaming services such as Napster paved the way for more modern and developed services such as Apple Music and Spotify. I believe the two biggest competitors in the market are Apple Music and Spotify due to their wide audience and far reach. In order to get the competitive edge in the market, companies must find a way to add a distinguishing feature to their service as to provide a competitive edge. I personally prefer Spotify due to its multiplatform compatibility and easy interface.

    Ek is an ambitious and zoned-in CEO. He prioritizes the people and the artists over profits and margins. This makes him a key player in the evolution of the music industry as he is revolutionizing the music industry and the way we listen to music through creating amazing features.

  14. Spotify has been able to change the game when it came to stock holding. Instead of going public how most companies do, they decided to use direct listing. Some believe that it is possible many companies will follow behind Spotify. This will cause harm towards underwriters because they will not be able to give shares to favorite customers and get first picks. Even though Spotify is already very known, they believe it is still the beginning for them.

  15. most company’s go public with their business, but Spotify decided to used direct listing. this is going to make the company get bigger than ever before, and will give them an edge in the live streaming music industry.

  16. Spotify has been able to change the way how we stream and listen to music. It is also one of the most largest music streaming platform there is in the industry right now. But now they have chosen to go with direct listing. And it is predicted that other companies will also go to the same path and do the same. This is good for Spotify since now they have to pay to listen, but bad for people who are trying to make it big but can’t because of this.

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