SPOTIFY: WHAT'S UP?

What’s up with the Spotify negotiations?

On the one hand, the Swedish steamery is bound by the rules of its financing to either launch its public offering imminently or pay ever-inflating penalties to the investors who ponied up for its last $1 billion infusion. The terms stipulate that for every six months the offering is delayed, the investors’ discount would balloon by 2.5 points above the 20% that can already be applied to investors’ conversion of debt to equity. Interest due on the debt, meanwhile would increase by 1% every six months (it’s now at 5%), up to 10%.

But the IPO, based on a recent $8 billion valuation, cannot proceed before the current round of royalty negotiations concludes, and Spotify has thus far been unable to get content owners to agree to a rate hike. Without a bigger slice of the royalty pie, the House of Ek claims, it will be unable to achieve profitability. The company currently pays out considerably more than half its income to rights holders.

As a standalone streamery, Spotify’s only sources of income are subscriptions and advertising on its free tier, both dependent on continued growth in a market that seems to have slowed, however momentarily. Its primary competitors, notably Apple and Amazon, have much smaller streaming marketshare, but given their revenue diversity and mountains of cash, neither is remotely pressed to make streaming profitable, as Spotify must. (Amazon has recently seen a 2% jump in marketshare to 8% of the pie, perhaps driven by big holiday sales for its Echo device.)

This is a symbiotic relationship; the rights holders and Spotify need each other. Some believe a compromise is in the air.

Do the recent departures of several key company players suggest that nobody at Spotify has had the deal-making chops to get this done? The clock is ticking, meaning one of several uncomfortable outcomes is in the cards:

1. Capitulation without a rate increase to salvage a timely IPO, in hopes that a stock-market onrush—and attendant subscriber spike due to the financial PR—will float the business until a path to profitability emerges.
   
   
2. Further delay and the payment of penalty fees to investors into 2018 while new negotiators (perhaps seasoned industry attorneys) attempt to hammer out a better deal, ostensibly powering a delayed, less inflated IPO but more stable business fundamentals.
   
   
3. Preparing the company for sale. Certainly a giant like Google or Facebook could afford to run Spotify as a loss leader for quite some time, and the attendant consumer-facing value would easily amortize those losses. The value of a streaming brand, even without a solid financial basis, can be huge. Jay Z’s Tidal, which had 1% streaming marketshare and was hemorrhaging money, recently announced it had sold a 1/3 ownership stake to Sprint for nearly four times his initial outlay. What would Sprint’s competitors pay to own—or partly own—the streamery favored by approximately 65% of the marketplace?

Despite all of this, it is in the interest not only of investors but of the biz as a whole—arguably including Spotify’s competitors—for it to achieve financial stability. This is a symbiotic relationship; the rights holders and Spotify need each other. Some believe a compromise is in the air. Stay tuned.