Spotify Is Getting Paid to Save the Music Industry: DealBook Briefing
Good Wednesday. Here’s what we’re watching:
• Spotify files to go public.
• Dick’s Sporting Goods will stop selling assault-style rifles.
• The end of an era for Ackman; the start for another one?
• What to make of Wall Street’s response to Mr. Powell?
• The Federal Reserve is walking a monetary tightrope.
• And is Jared Kushner’s weakness his family business?
Spotify is certainly getting paid to be the music industry’s savior.
Perhaps more than any other streaming service, Spotify has revived the fortunes of recording artists. It is funneling billions of dollars from its subscribers to music companies, which, for the most part, faced a bleak future. But a charity Spotify is not. The company appears to be taking a bigger and bigger cut of the revenue it receives from listeners, according to numbers first made public on Wednesday.
The numbers are included in Spotify’s financial filing with Securities and Exchange Commission ahead of listing its shares on the United States stock market. They strongly suggest that Spotify has successfully flexed its muscle as it negotiates the price it pays record companies for music. This shows up starkly in the filing’s discussion of an expense item called cost of revenues, which, the filing says, “consists predominately of royalty and distribution costs related to content streaming.”
The filing says Spotify had €3.67 billion of premium streaming revenue last year. The cost of that revenue last year was €2.87 billion. The difference between those numbers, the gross profit on streaming revenue, was equivalent to 22 percent of that revenue. That is well up from 16 percent in 2016 and 15 percent in 2015. And how did Spotify bolster its margins? A big factor: It signed more advantageous licensing agreements with music companies. “This decrease in cost of revenue as a percentage of premium revenue was driven largely by a reduction in content costs pursuant to new licensing agreements,” the filing said.
But can Spotify keep turning the screw? The music companies might be willing to compromise on price because the overall amount of dollars they receive is going up, making life easier for the first time in years. But, with Apple, Amazon and others adding subscribers, competition is intensifying. The music industry might be able to exploit that.
— Peter Eavis
Spotify’s cash flow mystery
Accounting nerds delving into Spotify’s filing will have stumbled on an odd discrepancy.
Two metrics that attempt to capture how much cash a company is taking in had very different totals for 2017. Ebitda, or earnings before interest, taxes, depreciation and amortization, was negative to the tune of €324 million last year. But net cash flows from operations totaled €179 million in 2017. Both totals benefited from adding back large noncash financing costs. So what items bolstered operating cash flows but not Ebitda?
It looks like operating cash flows did better in part because Spotify waited to pay some of its bills. Such items make up what is often called working capital. Spotify wrung €439 million of cash out of working capital in 2017. The question for investors is whether the company can do that every year.
Spotify files to go public.
The streaming music service filed its prospectus for a direct listing on the New York Stock Exchange, an unusual route that bypasses the traditional initial public offering process.
Direct listings essentially move trading in a company’s stock from private markets to public ones, with new investors buying shares on the open market.
Wall Street and Silicon Valley will watch Spotify’s listing closely. If it goes well, it could spur other high profile start-ups to pursue a direct listing. Wall Street bankers are unlikely to cheer such a development. Direct listings generate lower fees than the typical I.P.O.
Spotify won’t embark on its roadshow, a series of meetings with investor ahead of the listing, for at least 15 days.
Here’s a look at the details:
Ticker symbol: SPOT
Price range for private shares in 2017: $37.50-$125.00
Price range for private shares this year: $90.00-$132.50
Valuation range in 2017: $6.3 billion to $20.9 billion
Valuation range this year: $15.9 billion to $23.4 billion
Valuation based on the midpoint of its 2018 price range: $19.7 billion
Loss: €1.2 billion in 2017, up from €225 million in 2015
Operating loss: €378 million, compared with €235 million in 2015.
Revenue: €4.1 billion last year, up from €1.9 billion in 2015.
Free cash flow: €109 million in 2017
Ebitda: -€324 million in 2017
Monthly average users: 159 million last year, up from 91 million in 2015
Premium subscribers: 71 million, up from 28 million in 2015
Share of global streaming music market: 42 percent
The amount Spotify has paid in royalties to record labels since its inception: More than $8 billion
Percent of total voting power controlled by co-founder and chief executive, Daniel Ek: 37.3 percent
Percent of total voting power controlled by co-founder, Martin Lorentzon: 43.1 percent
Risks of a direct listing: “Our ability to sell your ordinary shares at or above the price you bought them for due to (i) our listing not having the same safeguards as an underwritten initial public offering, which may result in the public price of our ordinary shares being volatile and declining significantly upon listing, or (ii) the failure of an active, liquid, and orderly market for our ordinary shares to develop or be sustained.”