Wednesday 15 August 2018

Steve Dempsey: Spotify's stream comes true

Spotify IPO at the NYSE Photo: Reuters
Spotify IPO at the NYSE Photo: Reuters
Steve Dempsey

Steve Dempsey

Swedish music streaming company Spotify went public this week with an unconventional IPO. The direct listing on the New York Stock Exchange meant existing privately-held shares were made available to buy and sell freely on the stock market. Here's what CEO Daniel Ek said: "Normally, companies ring bells. Normally, companies spend their day doing interviews on the trading floor touting why their stock is a good investment.

Normally, companies don't pursue a direct listing. While I appreciate that this path makes sense for most, Spotify has never been a normal kind of company… our focus isn't on the initial splash. Instead, we will be working on trying to build, plan, and imagine for the long term."

The initial splash did go off without a hitch - almost. The New York Stock Exchange flew a Swiss flag (pictured) by accident for 15 minutes - Sweden, Switzerland, you know, whatever. They made amends by passing off the error on Twitter as a "momentary ode to our neutral role in the process of price discovery". An international incident was avoided and shares closed at $149, giving the world's largest streaming music service a value of $26.5 billion. Pretty good, given that Spotify still doesn't turn a profit.

So what makes the company so appealing? Well, it has a strong brand, cash on hand, and 157 million active users, 71 million of which are premium subscribers. And these paying subscribers are increasing 46pc year on year. So while Spotify can position itself as the digital heir to analogue radio, or the Netflix of audio content, its business model is much more akin to an older form of media; newspapers - before the internet came along and ruined the party, that is.

How so? Well, just like a newspaper, Spotify has direct revenue from sales. It also has an advertising revenue stream; the 86 million or so users who don't pay, but who are served ads. And it's testing out a form of classifieds in the UK and Canada that will allow smaller businesses to buy ads that target audiences according to age, gender, location and musical tastes.

To stay attractive to investors and fulfil its potential, Spotify needs to overcome some challenges. There are rival services owned by some large competitors; Amazon, Google and Apple. It's also top-heavy in subscription revenue - a good problem to have. Last year, premium subscribers accounted for €3.7bn in revenue, while advertising accounted for €416m. So Spotify needs to grow that number - which it's doing. Ad revenues have grown by 41pc since 2016. But audio and display ads aren't going to cut it. So Spotify is working on innovative new ways of partnering with brands. It has worked with alcohol brands like Bacardi to support up-and-coming Caribbean musicians, and Smirnoff to highlight the gender breakdown of listeners' habits for International Women's Day. Merchandising and other affiliate revenue streams are also being explored. For example, last November, makeup from Pat McGrath Labs was sold on via the Spotify profile of singer Maggie Lindemann, coinciding nicely with a new single from the US popstar.

Spotify's commercial innovation and product development is underpinned by data. Lots of data. Spotify reportedly tracks users' listening habits depending on variables as indepth as different weather conditions, or the speed at which the listener is moving - walking, running, commuting. These data points and the willingness to use them creatively are a crucial element in making Spotify a valuable media entity that could go public without a traditional IPO.

But with big data comes big risk. And Spotify isn't willing to risk its direct relationship with paying consumers to develop new commercial opportunities. The company's MD of sales for Europe, Marco Bertozzi, recently told Marketing Week how it vigorously protects users' data.

"A lot of advertisers want our data and they want to put it in data warehouses, we just don't do that," he said. "Our message to advertisers is that we've got loads of great ways that you can use this streaming intelligence, but it has to be respectful to our users and it has to be on our platform."

Makes sense given an increasing wariness of targeted advertising. Recent research from Reuters found that 63pc of Americans wanted less targeted advertising. But Spotify sidesteps some of the issues around creepy advertising. Targeted ads based on musical preferences seem entirely more acceptable than the psychographic profiling as practiced by the likes of Cambridge Analytica. A quote from Nick Hornby's High Fidelity comes to mind: "...what really matters is what you like, not what you are like."

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