By Isaac Simon
Spotify, the world’s number one music streaming service founded over a decade ago, went public on the New York Stock Exchange on Tuesday. The news is the company’s most recent step in expanding its market.
Spotify has twice the amount of paid monthly subscribers as its biggest competitor Apple Music. What has set Spotify apart from the rest of the available streaming services is its ability to blend free and premium subscriptions.
Of the 157 million monthly subscribers, 71 million are paid. This allows subscribers to receive ad free music streaming with the ability to create offline playlists. Still, more than half of Spotify’s subscribers use the service for free. The company expects to have close to one hundred million paid subscribers in the new year.
This move has music and business executives churning. Some believe that by going public, Spotify is one step closer to eliminating record labels, by working to solidify a stronger connection between themselves and the artists.
But even if this is true, it is very far off. Spotify has two different kinds of licenses for its streaming. The first is Sound Recording License agreements. This involves the rights to a specific recording. The second class is Musical Composition License agreements. This protects those who own the rights to the song.
Under the terms of composition license agreements, there are performance rights and mechanical royalties. Spotify currently has deals with the three major record industry labels: Sony, Universal, and Warner Music Group. Of the major record labels, Sony currently holds the largest minority stake with close to six percent ownership.
CNBC reported that the company has claimed to have paid out over nine billion dollars “in royalties to artists music labels and publishers since it launched in 2006.”
However, let’s take a moment to break down how this actually works. Let’s follow the flow of one dollar for an artist that is signed to a major record label.
Initially that dollar is broken down into subscription revenue and advertisements. Ninety cents goes to subscription revenue and ten cents comes from advertising. Of that total dollar, Spotify keeps 29 cents. From that, 59 cents flows to the record label, 6 cents in performance royalties and another 6 cents to the music’s publisher. The label keeps 50 of the 59 cents. Half of the performance royalties then flow to the artist and the publisher keeps nothing. This means the artist gets eighteen cents for every dollar of revenue.
In streaming, one finds the tradeoff faced by most musicians in the industry. What’s more important, exposure or profit? The payout is different if the artist is signed to an independent label. While they have less exposure overall, their cut is more than double of an artist signed to a major label.
Many in the business world have thrown out the term non-traditional IPO. Traditional IPO’s will sell shares to employees and big stockholder companies and have a series of different locks, whether it be three months, six months, or a full year. This is the minimum amount of time shareholders have to hold on to the stock before they can sell it to the greater public.
Spotify is releasing all of its stock at once with no minimum ownership requirements. This allows Spotify to get all the money up front for its shares at a certain time. This also allows them to get a really fast public opinion of what the company is worth. (Although estimates vary, the company has been valued at around thirty billion dollars). No financial firm will have an underwriting role in shares of Spotify stock. However. the company has hired Goldman Sachs, Morgan Stanley, and Allen & Company LLC to act as financial advisors.
So far, the market reaction has been positive. As of just a few hours ago the stock is up 28 percent with the price of initial shares being valued at $165.90. As of last year, the company has yet to make a profit. It is safe to say that this played a role in the company’s decision to go public. It is still unclear what kind of impact ‘going public’ will have on both markets and the music industry as a whole. But as investors watch, we will continue to listen.