SEMINARI 1 AEC. SPOTIFY.

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PREGUNTES A RESOLDRE

1. Identifica les principals fortaleses i debilitats que Spotify ha tingut en el període 2015 a
2018.
2. Identifica el tipus de creixement de l’empresa i utilitza el model de Higgins per analitzar el
seu creixement de ventes.
3. Explica como Spotify va incrementar el seu capital en els anys 2016 a 2018.
4. Utilitza el mètode de Pares per entendre els canvis en la rendibilitat.
5. Troba els comptes de Spotify del 1r semestre del 2022 i identifica les principals diferències
entre el període actual i el 2018 (només els indicadors més importants). Pots proposar noves
idees per millorar la seva situació financera actual?

INTRODUCTION

Spotify is a media app founded in 2006 in Sweden by the web designer and entrepreneur Daniel
Ek and now incorporated in Luxembourg. The primary business of the company is theaudio
streaming platform providing DRM (Direct Rights Management)-protected music and podcast
from media companies. There are both freemium services, offering basic features, and
premium service via paid subscriptions, with additional features and improved streaming
quality.

HISTORY

After founding his first company at age fourteen, in 2005 Daniel Ek began a new project in the
online marketing business with Advertigo. In 2006 it was sold to TradeDoubler for 10M of
Swedish crowns ($1,185,200). He kept in touch with the founder of TradeDoubler, Martin
Lorentzon, and he convinced him to invest in a new project that mixed two of his passions:
music and computing. They discussed the name of the company and in the end they decided
to call it Spotify (spot+identify). After this, they registered the brand and they start working on
the project with the support of a group of designers and engineers. The app was finished in
April 2006 but the launch was done later because they had difficulties to get licenses for

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Case written by Albert García, Ana Martín, Markel Iglesias, Antonio Martín and Lluís
Quintana; and supervised by profesor Oriol Amat, Universitat Pompeu Fabra, 2020.

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songs worldwide, so they opted to start with licenses in Europe.

In 7th October 2008, they launched Spotify in Sweden, Finland, Norway, France, UK and Spain
as a site to listen to online music for PC. Since then, users could access an extensive music
library without downloading anything. At that time the application had its already known free
account but you could only get it if you receive an invitation of another user. As the times were
changing and the creation of smartphones occurred, they needed to reinvent themself, so they
built its mobile application in 2009, in addition to the Premium andUnlimited modes without
advertisements. In May 2011, they limited the free account to 10 hours of music per month and
to listen the same song a maximum of 5 times.

After reaching popularity and becoming one of the most used applications, they started a
worldwide expansion starting with US and they competed with recognized music applications

as iTunes or Amazon Music. Sometime after this, Ek announced that the platform would
change and that it would contain diverse apps related to the music such as TuneWiki (lyrics),
CrowdAlbum (photographs) and Billboards (playlists and charts). Three years after, Spotify
eliminated the limit of hours of listening for free users, including instead short advertisements
that cannot be skipped. They opted for offering initial offers and more publicity. In 2015, a
new competitor, Apple Music, hit the market.

Financing
Since its founding, Spotify has had no problems attracting venture capital. It has raised
$2.7 billion in 22 funding rounds, including multiple debt financings. This includes a round
of $100 million in 2011 led by Accel Partners, a $100 million led by Goldman Sachs in 2012,
a $250 million in 2013 and a $526 million round in 2015 with 15 different investors, valuing
the company at $ 8.000 million.
In April 2018 Spotify entered the stock market with a market valuation of 21.839 million euros.
In the first session the initial offering price was 136,72 euros and the final price was 123,28
euros. Since then, the app has not stopped growing and innovating, improving the user
experience and consolidating itself as one of the most important apps of the moment, Spotify
has more than 207 million users and is available in 65 countries in Europe, America, Asia and
Oceania.

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The following timeline summarizes the most important facts of the company’s history in
chronological order:

INDUSTRY ANALYSIS
The music industry has changed disruptively during the last decades due to the appearance of
digital music and streaming platforms to the extent that nowadays about the 80% of the music
industry revenues come from the streaming music industry, where Spotify is the leader.
The first platform that appeared in this specific market was IUMA, where artist could post their
albums and songs for the audience; it was in 1993 the same year that the MP3 format came into
existence. It was around 2000 when digital music became a big thing and Napster was one of
the first peer-to-peer services where people could share and download copyrighted music. But
it was Spotify in 2008 the first to offer a platform where users had to pay to have unlimited
time to listen to music. Since then and seeing that the streaming music industry was growing
sharply, the competence also grew if we take into account that 10 yearsago Spotify was one of
the few ones to provide this services and recently other platforms appeared and even the giants
Apple and Amazon wanted to take part of it.
Every time more people are willing to pay for a music service and as we see in figure 1 the
industry is constantly growing and in the last five years the number of paid subscription sales
in streaming apps has increased by 400% and it is expected a constant growth for the next
years.

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Source: RIAA. Data for US in billion US dollars.

Main competitors
The online music industry is a growing market that has high competition.
Many of their main competitors are already working on some of the areas where Spotify
wants to penetrate. The most important competitors are:

• Providers of on-demand music: purchased or downloaded for free music such as

iTunes audio files, MP3, CD or other online providers.
• Providers of internet radio both online or on connected devices. These internet
radios may offer more extensive content than music streaming companies may
offer.
• Terrestrial and satellite radio may offer free content.Companies that offer the same
product as Spotify. This may be Apple Music, Google Play Music, YouTube Music,
SoundCloud, Amazon Prime ... affecting negatively their business. Moreover,
Apple, Google or Amazon have developed devices in which their music is
preloaded. Each company is trying to differentiate from its competitors to gain
market power.

Focusing on the direct competitors, Spotify is the leader of the industry followed by Apple
Music and Pandora.
The last numbers that the company has
reported show that they have a total of
232 million users, of which 108 million
are Spotify Premium subscribers,
almost the double than Apple Music, its
biggest competitor by the moment,
which reached 60 million paid
subscribers this past quarter. It is still far

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from the numbers of Spotify but they
entered in the market only five years ago
and they have overcome them in some
countries like the U.S.

Some of the competitors are much bigger than Spotify. For example, in the next table we can
see the difference in size with Apple.

SPOTIFY 2018 APPLE 2018

Total revenues 5,259 239,274

Net income (78) 53,631

QUALITATIVE ANALYSIS

WHO: The people

One of the two co-founders of Spotify is Daniel Ek, who is also the CEO and chairman, the
responsible for the vision and strategy of the company and the leader of the management team.
He acquired experience working in companies such as Tradera (an auction company where he
has a senior role), Starball (a browser based game where he was the CTO), 𝜇torrent (where he
was the CEO) and his own made up business Advertingo (an advertising company). The other
co-founder is Martin Lorentzon who is also a member of the board of directors. He has worked
in several telecom and marketing companies. Therefore, he hashuge management skills and
a big passion about music and computing, as well as Ek.
The senior management team of the company retains the 32.8% of the ordinary shares of
Spotify; where Daniel Ek owns the 19.8%, Martin Lorentzon the 12.7% and the rest of directors
own the remaining 0.3%. Furthermore, we could highlight the investmentmanagement firm
Baillie Gifford & Co with a 9.7% of the ordinary shares or the internet- based technology and
cultural enterprise company Tencent with a 9.2%.
The high qualified and skilled employees of Spotify are driven by compensations, culture and
reputation and the strength of the brand. In general, they reward the performance and
commitment of the workers. The philosophy of the compensation and benefits program has
four principles and objectives:

1. Attract, engage and retain the best experienced and managerial talented executives.
2. Align compensation with the financial and commercial objectives and the interests of
the shareholders.
3. Motivate and reward executives that enable the continued success of the company.
4. Ensure that the total compensation is reasonable, competitive and fair.

Then, to retain skilled executives, they compensate them with the base salary (which is a
mandatory wage), equity incentive compensation, some severance benefits, retirement saving
plans and health and welfare benefits and certain limited perquisites and personal benefits.
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Moreover, they reward them with long-term value creation equity grants and recognition of
achieving the financial and strategic objectives.
Spotify strives to create an environment that is responsible to the needs of their employees, is
open towards employee communication and encourages teamwork.

WHAT: Strategy

Even though competitors are big powerful companies, Spotify controls the market and has the
highest market share (see figure 3), due to the fact that competitors have just entered in the
industry (Apple Music) and that they have focused their business in other products services
(Apple smartphones and computers, Amazon worldwide trade).
Moreover, it operates in an industry with several entry barriers. In order to establish and
generate clients, you need a strong initial investment. Spotify music catalogue is the biggest,
because it has been more time in the market than its competitors.
The geographic market has no limit, composed by all those parts of the world that have internet
connection. Spotify operates in over 80 countries (+100 million subscribers) around the world.
The fact that the service/product provided is virtual and not physical makes iteasier to
enlarge the size of the market.
Figure 3. Streaming subscriber market share in 2018. Source: Midia research.

Spotify only offers one unique product/service. A virtual account through which you can listen
to all music you want from any smartphone or computer; with only one requirement, internet
connection. However, we can split up this service in two: free subscription or paid- subscription
(some advantages). This diversification of the product is significantly positive asit helps to
increase the number of users as some are well enough with the free account characteristics and
do not need to pay for more. Otherwise, many of this people will refuse to pay and will leave
the platform.
Concerning the target audience, most Spotify users are under 35 and, specially, between 18 and
24 years old.
Currently the company is increasing even more the number of users following a catching-up
plan based on free trials in order to turn these free subscribers into paying subscription based
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customers, and family packs “pay x amount for several accounts”. And they are also trying to
expand their market operations beyond music, such as podcasts, which implies an increment
on risk due to the investment and facing-up with more competitors, but might generate future
profits.

HOW: Operations

The company prioritize long-term user engagement over short-term financial results. There is
a substantial investment in marketing, where we find expenses related to live events, trade
shows, publicity, promotion of new releases, cost of providing free trials, employee
compensations, etc. which are key factors in the process to ensure the highest quality product.
Moreover, there is a big focus in intellectual property trying to constantly innovate relying on
multiple software programmers to design their proprietary technologies and then file patent
applications on their innovations. Spotify has permanently lived with negative profits since its
foundation. This can be account that Spotify gets a fixed amount per user as a revenue, but the
more people listen to a song the more they pay to the artist so these costs can easily increase
andare not easy to control.
According to Business Insider between 4 and 10 trillion songs are illegally downloaded
every year, while only 4 billion legal downloads happen per year. It means that customers
will pay for convenience and accessibility.
One of the main characteristics of the services that Spotify offers is the free subscription. This
option allows subscribers to use the entire music library. Customers have the incentive to
change their fee into any of the several premium options in order to eliminate the advertising
that pops up when using the app and be able to choose particular songs.
To convert into premium subscribers, customers have different options:

Options Monthly fee

College students plan 4,99€

Standard plan 9,99€

Family plan 14,99€

PRESENT SITUATION

Spotify is the leader of digital music streaming companies, a sector with great growth, it has
grown in the last years specially due to the increase in subscription sales. Despite this, both
Spotify and its competitors, move within a complicated market, with legal differences between
the countries, on various topics such as copyright, which are a large part of their expenses. This
is the biggest reason why Spotify accumulates losses and has not yet generated profits (see
figure 4).

Figure 4. Spotify’s revenue and losses from 2009 to 2018 (in million euros). Source:

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Statista

After some expansion in the Middle East and North Africa they have reached a lot of new users.
This explains why in the third quarter of 2019 Spotify had for the first time positive netprofits.
Focusing on the future, the company forecasts again loses in the next years as they are
reinvesting to continue their world expansion, but given this, and the fact that Spotify is
changing its business model trying to create their own content (such as audio books and
podcasts) to reduce the royalties they predict that net profits will continue growing in the future
(see figure 5).

Figure 5. Analist’s forecasts for Spotify (Source: Markets Insider)

2020 2021
2019 Estimated Estimated
by 26 analysts by 26 analysts

Revenues (million euros) 6.700 8.360 10.060

Losses (million euros) -186 -18 -118

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Appendix
Figure 6. Spotify balance sheets (million euros)
2018 % 2017 % 2016 % 2015 %
Non-current assets 2090 48,2% 1209 38,9% 191 9,1% 180 17,1%
Property and equipment 197 4,5% 73 2,3% 85 4,0% 81 7,7%
Intangible assets including goodwill 174 4,0% 162 5,2% 77 3,7% 73 6,9%
Long term investments 1646 38,0% 910 29,3% 0 0,0% 1 0,1%
Restricted cash and other non-current assets 73 1,7% 63 2,0% 30 1,4% 29 2,8%
Current assets 2246 51,8% 1898 61,1% 1909 90,9% 871 82,9%
Trade and other receivables 400 9,2% 272 8,8% 223 10,6% 244 23,2%
Short term investments 915 21,1% 1032 102,3% 830 39,5% 0 0,0%
Cash and cash equivalents 891 20,5% 477 15,4% 755 36,0% 597 56,8%
Other current assets 38 1,8% 29 0,9% 18 0,9% 27 2,6%
TOTAL ASSETS 4336 100% 3107 100% 2099 100% 1051 100%
Equity 2094 48,3% 238 7,7% -240 -11,4% 229 21,8%
Paid in capital 3801 87,7% 2488 80,1% 830 39,5% 797 75,8%
Retained earnings -2505 -57,8% -2427 -78,1% -1192 -56,8% -653 -62,1%
Accumulated and other comprehensive income 798 18,4% 177 5,7% 122 5,8% 85 8,1%
Non-current liabilities 95 2,2% 1009 32,5% 1120 53,4% 24 2,3%
Long term debt 0 0,0% 944 30,4% 1106 52,7% 0 0,0%
Accrued expenses and other liabilities 93 2,1% 62 2,0% 14 0,7% 24 2,3%
Deferred tax liabilities 2 0,0% 3 0,1% 0 0,0% 0 0,0%
Current liabilities 2147 49,5% 1860 59,9% 1220 58,1% 798 75,9%
Trade and other payables 427 9,8% 342 11,0% 139 6,6% 119 11,3%
Income tax payable 5 0,1% 9 0,3% 6 0,3% 5 0,5%
Deferred revenue 258 6,0% 216 7,0% 149 7,1% 92 8,8%
Accrued expenses and other liabilities 1076 24,8% 880 28,3% 668 31,8% 485 46,1%
Other current liabilities 381 8,8% 413 13,3% 258 12,3% 97 9,2%
TOTAL EQUITY AND LIABILITIES 4336 100% 3107 100% 2099 100% 1051 100%

Figure 7. Spotify income statements (million euros except share and per share data)

2018 2017 2016 2015 2014

Revenue 5259 4090 2952 1940 1085

Cost of revenue 3906 3241 2551 1714 911
Gross profit 1353 849 401 226 174
Research and development 493 396 207 136 114
Sales and marketing 620 567 368 219 184
General and administrative 283 264 175 106 67
Operating loss (43) (378) (349) (235) (191)
Finance income 455 118 152 36 28
Finance costs (584) (974) (336) (26) (19)
Share in (losses)/earnings of associate (1) 1 (2) - -
Finance income/(costs) net (130) (855) (186) 10 9
Loss before tax (173) (1233) (535) 225) (182)
Income tax (benefit)/expense (95) 2 4 5 6
Net loss attributable to owners of the parent (78) (1235) (539) (230) (188)

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 Figure 8. Spotify cash flow statements (million euros)

2018 2017 2016 2015

A) CASH FLOWS FROM OPERATING ACTIVITIES

1) Earnings before taxes -78 -1,235 -539 -230

2) Amortization & depreciation 32 54 38 30

3) Deferred income taxes -95 2 4 5

4) Stock based compensation 88 65 53 28

5) Change in current capital 251 420 300 175

6) Debtors and other accounts receivable -61 -112 -60 -121

7) Accounts payable 291 447 245 251

8) Other working capital 219 133 74 -87

9) Other cash flows from operating activities 136 856 242 -11

10) Cash flows from operating activities(1+2+3+4+5+6+7+8+9) 783 630 357 40

B) CASH FLOW FROM INVESTING ACTIVITIES

11) Payment for investments -125 -46 -27 -49

12) Acquisitions, net 0 -49 -8 -8

13) Purchases of investments -1,069 -1,386 -1,397 0

14) Other investing activities -54 -34 -12 -10

15) Sales/ maturities of investments 1,226 1,080 609 0

16) Cash flows from investing activities (11+12+13+14+15) -22 -435 -835 -67

C) CASH FLOW FROM FINANCING ACTIVITIES

17) Debt repayment 0 -4 -5 -4

18) Common stock issued 0 0 0 474

19) Other financing activities 1 0 22 -4

20) Cash flows from financing activities (16+17+18) 1 -4 17 466

E) INCREASE / DECREASE IN CASH AND CASH

762 191 -461 439
EQUIVALENTS (10+16+20)

Cash and cash equivalents at the beginning of the year 477 755 597 206

Cash and cash equivalents at the end of the year 1239 945 136 645

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 Figure 9. Spotify ratios

2018 2017 2016 2015

DEBT AND CAPITALIZATION

Debt = Liability / Assets 0.52 0.92 1.11 0.78

Debt Quality = Current Liabilities / Total Liabilities 0.96 0.65 0.52 0.97

Financial Expenses = Financial Expenses / Sales 0.11 0.24 0.11 0.01

LIQUIDITY

Liquidity = Current assets / Current Liabilities 1.05 1.02 1.56 1.1

Treasury = (Debtors +Cash) / Current Liabilities 0.6 0.4 0.8 1.05

Acid Test = Cash / Current Liabilities 0.41 0.26 0.62 0.75

Real Working Capital (million euros) = Current assets - Current Liabilities 99 38 689 73

Operating Working Capital (million euros) = Operating current assets - Operating

-888.3 -764 -452 -280.2
current liabilities

Operating CA = Inventory + Clients + Other operating CA + Minimum cash required 614.7 458 355 323.8

Operating CL = Suppliers + Other operating CL + Accruals 1503 1222 807 604

Working capital surplus/deficit (million euros) 987.3 802 1141 353.2

ASSET MANAGEMENT

Non-current assets turnover = Sales / Non-current assets 2.52 3.38 1.55 1.08

Current assets turnover = Sales / Current assets 2.34 2.15 1.55 2.23

TERMS

Inventories days = Stocks /Daily cost of sales 0 0 0 0

Days receivables (days) = Clients / Daily Sales 27.76 24.27 27.57 45.91

Days payable (days) = Suppliers / Daily cost of sales 39.90 39.52 19.89 25.34

SALES

Sales growth = This year’s sales / Previous year sales 1.29 1.39 1.52 1.79

PROFITABILITY

ROI = (EBIT / Assets) x 100 -1.8 -39.75 -25.68 -21.88

ROE = (Net profit / Equity) x 100 -3.72 -5.19

Negative
-1
equity

Self-financing on sales = (Cash flow - Dividends) / Sales 0.14 0.05 -0.15 0.23

Self-financing on assets = (Cash flow - Dividends) / Assets 0.18 0.06 -0.22 0.42

Note: Spotify has never paid dividends.

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Figure 10. Shareprice evolution of Spotify from April 2018 till December 2019

Figure 11. Stock exchange information and ratios of Spotify and Apple (Source:
Markets Insider)

Spotify Apple
April 3, Dec. 31, Dec. 31, Dec. 31,
2018 2018 2019 2019
Initial
Public
Offering
Market capitalization (000 million euros for 21,83 20,53 26,11 1,287
Spotify and 000 million US dollars for
Apple)
Shareprice (euros for Spotify and US 136,72 118,51 149,55 297,43
dollars for Apple)
Price Earnings Ratio Negative Negative Negative 17,48
Enterprise Value / EBITDA Negative Negative Negative 11,67
Price Sales 4,15 3,63 3,93 3,76
Price to Book Value 10,42 11,26 12,67 10,84
Yield (Dividend per share / Shareprice) 0 0 0 1,38%

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