Music-streaming company Spotify Technology SA cemented plans for its unusual initial public offering while revealing
the financial particulars of a fast-growing company that upended the music industry and revolutionized how consumers listen—but spent heavily to do so.
Stockholm-based Spotify filed to go public Wednesday by submitting a so-called F-1 to the Securities and Exchange Commission that contains years of data and details about how the 10-year-old company will launch its IPO.
The filing showed that the company’s revenue is growing sharply but its losses are ballooning. It posted €4.1 billion ($5.01 billion) of revenue in 2017, up nearly 39% from the prior year. The company, which has yet to turn a profit, posted a loss of €1.24 billion in 2017, up from €539 million in the prior year and €230 million in 2015.
Its revenue growth has slowed recently; it was 52% in 2016.
Spotify’s debut will be one of the biggest tech listings in recent years. Based on private transactions in February, Spotify’s value touched $22.6 billion.
A standard IPO timeline indicates Spotify’s shares could begin trading publicly on the New York Stock Exchange as soon as the week of March 26, after a period when the company pitches itself to potential investors.
Unlike a traditional IPO, no new shares will be offered when Spotify goes public. Instead, through a process known as a direct listing, Spotify will simply float its existing shares and let the market find a price without banks serving as underwriters to set pricing, allocate shares to investors and backstop trading, as is typical in a regular listing. There is little precedent for the kind of direct listing Spotify is attempting.
Spotify’s listing will likely be coveted by investors who are seeking high growth that often comes with big-name, high-valued technology IPOs, which have been rare of late. Most of the startups with the highest valuations—including ride-hailing service Uber Technologies Inc. and home-rental company Airbnb Inc.—have put off going public as they still have access to ample capital from big investors.
Launched in Sweden in 2008, Spotify brought its service to the U.S. in 2011, stoking a disruption—and recovery—of the music industry. In a market depleted by piracy and file sharing, Spotify introduced a massive library of songs available to users free in exchange for listening to ads or on-demand for $9.99 a month. The service boasts 35 million songs, according to the filing, and said it has 159 million monthly active users. As of Dec. 31, it had 71 million paying subscribers.
Paid subscriptions, up 61%, were the largest source of record-company revenue in the U.S. in the first half of 2017, according to the Recording Industry Association of America.
Still, music streaming has yet to prove itself as a viable business, as companies operating such services struggle to reach profitability. As the services grow, active users and paid subscribers are the most closely watched metrics. Spotify has said it believes it can become profitable once it has amassed sufficient users, without specifying what that level would be.
Figures released by the company indicated that 44% of users in 2017 were paying subscribers, up from 31% in 2015. Subscribers generate much more revenue than users who listen via the company’s ad-supported free option.
But Spotify also said that those paying subscribers have been generating a shrinking amount of revenue, on average. A “premium” user was worth an average €5.24 a month in 2017, down from €7.06 in 2015. The company attributed that decline to the introduction of discounts for students and families, which it said were important for attracting and retaining subscribers.
Some music-company executives have grumbled over Spotify’s challenges at converting users of its free tier into paying subscribers, people familiar with their thinking have said.
Meanwhile, Apple Inc.’s music streaming service, which only offers a subscription model, has been adding subscribers in the U.S. at a faster rate than Spotify.
Spotify remains the global leader, with nearly twice as many paid subscribers as No. 2 Apple Music. Tech giants Amazon.com Inc. and Alphabet Inc.’s YouTube also operate paid music-streaming services, as does Internet-radio company Pandora Media Inc.
By structuring its IPO as a direct listing, Spotify will save tens of millions on banker fees, paying roughly $35 million, according to people familiar with the structure, rather than the $100 million Snap Inc. paid for its IPO with an expected initial valuation close to what Spotify is expected to debut at.
Instead of setting a price and placing shares with chosen investors before trading begins, Spotify’s advisers at Goldman Sachs Group Inc.,Morgan Stanley and Allen & Co. will perform a lesser role by helping guide buyers and sellers to a price by gauging interest at various price points. They won’t participate in investor meetings ahead of the kickoff of trading, the filing said.
Spotify, in its filing, indicated how the price will be decided when its shares open for trading. While Spotify’s advisers won’t build a book of investors or choose a price, the company said Morgan Stanley will consult with so-called designated market maker firms to set the opening public price of Spotify shares on the New York Stock Exchange, which will be determined by the buy-and-sell orders from investors
Despite a pushback against dual-class shares from index funds and the SEC in recent months, Spotify will have a dual-class structure that gives the founders, Daniel Ek and Martin Lorentzon, 80.4% of the voting control. Mr. Ek, the company’s chief executive, recently held about 25.7% of its stock, while Mr. Lorentzon held roughly 13.2%.
By: Maureen Farrell and Anne Steele (The Wall Street Journal).
Photo: Variety.
Review: Emerging Market Formulations & Research Unit, Flagship Records.