Spotify

1. Discuss the economics of the music streaming industry and Spotify’s advantages or disadvantages
in it.
2. Evaluate Spotify’s past performance and discuss its financial needs.
3. What are the imperatives that push Spotify toward an IPO? Discuss the case for a direct listing
versus an underwritten IPO
4. Given the data you have, value Spotify and discuss what price it should trade at.

MUSIC STREAMING INDUSTRY

In response to Jennifer Wang contemplating an investment in the music streaming service Spotify
Technology SA (Spotify) for what price and horizon, a detailed analysis is performed.

Executive Summary:
This report presents a comprehensive analysis of Spotify's strategic move towards a direct listing
Initial Public Offering (IPO). The music streaming industry's economic landscape, Spotify's position
within it, the evaluation of its past performance and financial needs, imperatives driving the IPO
decision, and considerations for the direct listing approach are thoroughly examined. Additionally, a
discussion on the valuation of Spotify and considerations for its trading price is provided.

The music streaming industry's economic landscape & Spotify's position within it

The music streaming industry has undergone a major transformation over the last five years. The
company leading this transformation isSpotify Technology S.A. based in Luxembourg, Sweden. It is a
public limited Company incorporated and domiciled in Luxembourg, Sweden.

Spotify is operating in a highly competitive business environment where it is pitted against leading
players like Amazon, Apple, and Google apart from several other smaller players. Despite the heavy
competition, Spotify has maintained its leadership position and competitive edge. To understand the
industry’s economic landscape and Spotify’s position within it, Porter 5 forces analysis has been
performed
Threat of New Entrants (LOW) - large capital requirements, stringent norms of legal
compliance(copyright laws and streaming laws) and proprietary technology need pose a barrier for the
new entrants. In addition, the competition from incumbents like Google, Apple, Amazon having
resources (large user base, curated catalogue) and capabilities (capital availability for investment in
technological innovation) further increase the barrier to entry for new entrants. Another challenge for
new entrants is positive income generation. due to high operating costs.

Bargaining Power of Suppliers (MOderate) - the primary suppliers are performance artists (signed by
record labels) for and record labels (Sony BMG, Universal Music Group, and Warner Music Group
together controlling 80% of market signed the artists for production, distribution, marketing of songs)
with the secondary songwriters, talent managers, etc. The bargaing power of these primary suppliers
are moderated by the strong brand popularity of SPOTIFY. The google cloud platform - leading
technology supplieris also one of the suppliers whose bargaining power is moderated by the threat of
vertical integration with other suppliers.
Bargaining Power of Buyers (Moderately High) - intrinsically the customers have high bargaining
power owing to the availability of multitude of substitutes which is moderated by the SPOTIFY’s
quality, collection, marketing and pricing strategy and the large investments in R&D helped it enjoy
higher user retention.

Availability of substitutes (Moderate) - The threat of substitutes in the music streaming industry
comes from alternative ways of accessing music, such as purchasing physical albums, digital
downloads, or listening to free ad-supported platforms. However, the convenience and cost-
effectiveness of streaming services make them a preferred choice for many consumers,
mitigating the threat to some extent.

Intensity of Rivalry (High): The rivalry within the music streaming industry is intense. Major players
like Spotify, Apple Music, Amazon Music, and others vie for market share through exclusive content,
personalized features, and competitive pricing. Differentiation is crucial, and companies invest
significantly in marketing and technology to maintain or enhance their competitive positions.

From above we can conclude that the music streaming industry, characterized by low entry
barriers, supplier concentration, high buyer power, moderate threat of substitutes, and
intense competitive rivalry, poses both challenges and opportunities. Companies must
navigate these forces strategically by continuously innovating, securing exclusive content,
and enhancing user experience to maintain a competitive edge in this dynamic market.
Understanding and adapting to these forces are essential for long-term success in the music
streaming industry.

Spotify's position within the music streaming industry is characterized by global market
leadership, a rich music library, technological innovation, strategic content partnerships, and
a freemium model that balances user acquisition and revenue generation. While facing
challenges related to content acquisition costs, Spotify's strategic responses and continuous
focus on differentiation contribute to its strong competitive position in the dynamic and
intensely competitive music streaming landscape.

Evaluate Spotify’s past performance and discuss its financial needs

Spotify's strategic acquisitions, such as The Echo Nest Corporation in 2014 and subsequent purchases
of technology-focused firms between 2013 and 2017, underscore the company's commitment to
technological innovation. The €49.7 million acquisition of The Echo Nest added music intelligence
capabilities to Spotify's arsenal, allowing it to understand user music preferences and curate
personalized recommendations. Other acquisitions targeted technologies related to song
identification, blockchain data solutions, and software enhancing personalized recommendations.
These strategic moves align with Spotify's goal to stay at the forefront of user experience and content
curation within the competitive music streaming landscape.

In terms of financial strategies, Spotify's decision to raise $1 billion in convertible debt in March 2016
from investors like TPG, Dragoneer Investment Group, and Goldman Sachs indicates a proactive
approach to address its financial needs. This capital infusion, combined with previous funding
rounds, bolstered Spotify's cash reserves. The convertible debt, with an annual interest rate of 5%,
provided flexibility for potential equity conversion at a discount in the event of an initial public
offering (IPO). Subsequent private trades and Tencent Music Entertainment's investment further
emphasized investor confidence, with Spotify's valuation reaching $20 billion. However, the annual
income statements reveal a net loss of €1,233 million in 2017, reflecting the company's challenges in
achieving sustained profitability despite robust revenue growth. This underscores the importance of
strategic financial management and continued efforts to optimize its business model in the dynamic
music streaming industry.

With the profitability yet to be achieved, SPOTIFY paying out 70% of its revenues to copyright holders
nessicitates the requirement to continually seek capital for growth.