Music streaming has been a hotly contested market for years now and it hasn’t shown any signs of slowing down. More and more, consumers are opting to rent their music for monthly fee, as opposed to paying for individual albums or tracks. This shouldn’t surprise anyone given the how ubiquitous high-speed internet access has become over the last decade. Spotify was one of the first companies to offer a music streaming solution on a massive scale that was easy to use and promoted organic music discovery. Their meteoric rise has brought them to one of the most critical points in the company’s history: Spotify has filed for an initial public offering and will trade on the New York Stock Exchange.
While this is usually great news for many companies, I can’t seem to get excited for Spotify. Despite being the market leader in music streaming today, among their major competitors Spotify is the only company that derives their entire revenue stream from this business. That’s not a good thing. Furthermore, their biggest competitor, Apple, is spending over $1 billion in bolstering their streaming service with original video content. So in this hotly contested market, with intense competition, how does Spotify continue their steady growth? Well, maybe they don’t.
The streaming giant will dwindle to a shadow of its former self in the coming years
I believe Spotify had no choice but to go public as a last-ditch effort to strengthen their position in the streaming market. However, this decision is coming far too late in the game, and save for a miracle of a pivot, the streaming giant will dwindle to a shadow of itself in the coming years.
Spotify has yet to report a profitable quarter
It’s no secret: Spotify’s earning potential is deeply connected to their deals with record companies. While they do a fantastic job of managing their fixed operating costs, the nature of the streaming business has resulted in the company unable to report a single profitable quarter to date. Spotify can look to shave even more operational costs to squeeze some profits, however this could result in less dollars being put into marketing, research, and expansion. Oh, and did I mention Apple is liberally throwing more money at their service?
Another item to consider is that Spotify is one of the few companies that offers a free streaming tier. While this is great for users, it dilutes the earning potential for Spotify and adds yet another burden to overcome. This results in a scenario where, despite 70 million paying customers, the 80 million free users can detract up to 20% of the revenue provided by each paying customer. The strategy that Spotify has championed is actively working against their future success.
Spotify is going to war with giants that can afford to lose money in streaming to succeed
Imagine having a finite number of soldiers and going to war with a nation that not only has an endless supply of militia, but is entirely willing to turn a battle into a never-ending bloodbath. This is the situation that Spotify faces. They’re a company that’s entirely rooted in the music streaming business, and they’re competing with rivals that have diverse revenue streams often multiples larger than the music service they provide. It’s not exactly a fair playing field.
How can we be led to believe that Spotify will continue to grow at their current rate when the companies they’re trying to outpace are spending ruthlessly to catch up? It took Spotify well over a decade to get to where they’re at now. But it took Apple less than 3 years to accrue half the paying users that Spotify has. Not to mention, Amazon and Google don’t plan on exiting the business anytime soon. You can expect them to throw money at the problem to siphon even more users from Spotify.
They had no choice but to go public
Spotify had to go public sooner or later. At some point, they would need to find a means to generate even more cash flow to expand their user base. Going public allows them to do this. Amidst some findings that going public would alleviate existing debt issues through some accounting jiujitsu, this decision comes at a time that is critical to Spotify’s future.
As I mentioned earlier, the main source of revenue right now for Spotify is paying users. If the company expects to survive for even another decade, they’ll need to diversify and discover alternative means of cashflow. Being a publicly traded company is the fuel that’ll aid that expansion. However, it isn’t a guarantee of their success. This is why I remain hesitant to believe the hype. And truthfully, I don’t think that this moment is worth celebrating.
This is an acceptance that their backs are against the wall in a volatile industry
Looking at all this, it begins to make a lot more sense as to why Spotify going public isn’t an indicator of their dominance in the market. This is an acceptance that their backs are against the wall in a volatile industry even though they have the largest paying user base. The Swedish startup is facing immense competition that is willing to ‘break the rules’ to succeed. And despite the $5 billion in annual revenue they’re seeing, Spotify will have to really entice investors to aid their growth.
I can envision a future in which Spotify gets bought out by a much larger company
I didn’t write this piece to completely shoot down Spotify and spell their demise. Looking at the critical variables, I just don’t see them growing like they did in the past. And further to that, I can envision a future in which Spotify gets bought out by a much larger company to stimulate the parent company’s catalog.
Despite all these real factors that exist, Spotify asserts that they will have a very good 2018 and see their paying subscriber base grow to 96 million, a 36% boost over the previous year. We will have to wait and see if this type of growth will continue for a sustained period of time, or that long overdue beat drop which ultimately leads to a skipped track.