Spotify, the popular yet unprofitable music streaming service, is planning a very unconventional IPO. IPO is short for “initial public offering,” a way for companies to raise a bunch of money by selling shares that can then be traded on a stock exchange.
With Spotify’s IPO, the narrative so far has been that this is yet another tech company innovating and “disrupting” investment banking. But that image is starting to erode.
Typically, how IPOs work is the company going public hires a big investment bank – or several of them – to both issue new shares and then go out and sell them. But Spotify plans to simply list its shares on the market and let them trade.
George Parker, a finance professor at Stanford, says this is almost unheard of. “To me that is very analogous to a person that puts a sign out on the street and says this property is for sale by owner.”
It’s like saying I got the coolest house on the block. Everyone will want to buy it. So why give a cut to a broker?
“Spotify, by doing this, is very confident that the public already understands Spotify’s value and that it does not need others to tell the story,” Parker says.
Some analysts estimate this could save the company as much as $300 million in fees. Also, Spotify’s current private investors can simply cash out without waiting for the traditional lock-in period to end. From this perspective, a direct listing is just a more efficient way to IPO.
Kathleen Smith, founder of Renaissance Capital, says, “We don’t think at all that this is another way to go public. It’s an inferior way, a defensive way to come out into the public market.”
Smith says in 2016 Spotify got an unusual loan from a group of private investment firms including Goldman Sachs. The investors demanded a number of conditions to the loan, “suggesting that the investors thought the company’s private valuation was way too high.”
Spotify boasts 140 million users, but most of them don’t pay. They listen to the ad-supported stream. And ad revenue is only $300 million a year, a fraction of what the service truly costs. Spotify recently announced plans to move more aggressively into podcasting and multimedia news, a space where ad revenue may be more lucrative.
Jake Shapiro, CEO of the podcasting platform RadioPublic, says global podcasting ad revenue is about $250 million a year.
“And by all measures it’s growing by leaps and bounds and we anticipate doubling and tripling in the coming months a years.”
So if Spotify’s plans are successful, it would be positioned to take advantage of that growth. But right now Spotify is still an unprofitable company, pushed towards an IPO by private equity firms eager to cash out. Smith says mom and pop investors aren’t buying it.
“Investors have been more cautious about companies that don’t make money.”
Spotify’s IPO is scheduled for late March or early April. But many details remain to be worked out.
