Business Technology

Saturday 24 March 2018

Spotify’s next investors may face the music


Jeffrey Goldfarb

Spotify’s latest figures are both impressive and worrisome. The Swedish streaming-music service increased revenue 80pc last year, to €1.9bn, or about $2.1bn.

Its number of users swelled from 60 million in 2014 to nearly 90 million. And the 28 million paying subscribers it has signed up represent over 40pc of the total streaming market. Even assuming generous growth and operating leverage in the future, though, it may be hard to justify a higher valuation than its most recent one.

The 10-year-old company led by cofounder Daniel Ek is confronting a common problem for digital music startups. A substantial portion of sales goes toward royalties and distribution fees. In Spotify’s case, the amount was 84 cents of every dollar last year, even higher than the 60 cents that hampers rival Pandora.

Because Spotify is losing money, there’s a tendency to accept non-standard methods of assessing its value. For example, the firm – whose June 2015 fundraising imputed an $8.5bn valuation – is now worth more than four times revenue, a multiple on par with the $20bn US satellite radio company Sirius XM, a more established business that generates higher sales per subscriber.

Assume, however, that Spotify keeps expanding rapidly. Say it could roughly quadruple revenue by 2020, to $8bn, with a greater proportion from advertising. That would give it nearly the entire market for streaming-music revenue, which research outfit Midia forecasts will be $8.5bn in four-and-a-half years.

Spotify’s operating expenses account for about 25pc of sales. If they could be pared to 15pc and royalties to 75pc, it would leave $800m in profit. Taxed at 20pc, that would net out to about $640m. Using more conventional financial analysis and putting those earnings on a multiple of 15 would make Spotify worth about $9.6bn.

Maybe the company expects its clout will enable it to pay even less to musicians and their labels. It also could be eyeing new sources of revenue, perhaps ones with higher margins. A $1bn convertible bond Spotify issued earlier this year gives it firepower for acquisitions and investment. The terms also put it under greater pressure to go public soon. That may be when it faces the financial music.


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