2017 IPO Prospects: Spotify IPO Delays Again

In the early months of 2017, many analysts were predicting that the dry period for IPOs was over and the 2017 IPO prospects were good. One of the companies predicted to make an initial public offering in that year was Spotify, the Stockholm-based music streaming service which had risen to prominence and fame over the previous ten years. However, still early in 2017, rumours began to circulate that Spotify was seriously considering delaying its IPO, perhaps until 2018 in order to position the company more strongly so that it could achieve a valuation of between US11 billion and US$13 billion. What effect would such a delay have on the 2017 IPO prospects? Would it be a portent of things to come or was it a one off, brought about by the special circumstances of the music streaming giant and the specific problems which it faced in advance of going public?

Spotify ipo prospects were in some ways difficult to exactly appreciate. On the one hand, Spotify was a world leader in the music streaming industry, with over a hundred million customers. On the other, it was at least in part a free streaming service and even though the free streaming came with ads included, this obviously impacted on the company’s profitability, an all important factor driving the interest of potential investors in the event of an IPO. Yet against this was the facts that between 40 and 50 million of the customers on the Spotify platform were paying for the ad-free service which they received. The latest figures available, for 2015, showed that Spotify, for all its US$2.8 billion revenue was running at a loss of US$194 million. Clearly the profit margin from each of its customers needed to be improved if the company was to show a profit and Spotify planned to achieve this with its Hi-Fi service, which for an additional fee offered loss-free wireless service, likely to prove popular with the growing number of consumers who utilised such wireless headphone systems as Bluetooth and Lightning. This desire to improve the financial metrics of the company perhaps explains the reasons for Spotify’s delay and it is quite understandable. Would this affect the 2017 IPO prospects? It seems specific to the circumstances of the company.

Also specific to Spotify and thus unlikely to impact on the 2017 IPO prospects, in general, was the matter of the licensing arrangements which are so important to all music streaming businesses. By early 2017 Spotify was locked into deals with the major labels, hoping to increase its own margin. Whether the company can do this is a matter for debate. Certainly, the sheer size of Spotify and its customer base gave the company leverage in its licensing negotiations, but concerns remained that the other interested parties were unable to make the concessions required. If this impasse remained then the delay in the IPO would be prolonged. However, the 2017 IPO prospects as a whole would probably not be too heavily influenced by this one specific problem related to the inner working of one specific industry.

(Simon Topliss, Research Analyst)

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