Spotify has already won over the music industry, and listeners worldwide, with an online streaming service that makes millions of songs instantly available. Now, it is ready to test its business model on Wall Street.
On Wednesday, the company filed a prospectus to sell shares on the New York Stock Exchange, an indication of the imminent arrival of one of the most anticipated technology stocks in years. It was also a signal of the maturation of the streaming market that has already begun to revive the long-struggling music industry.
Instead of a traditional initial public offering, Spotify will, as expected, pursue a direct listing of its shares, an unusual process in which no new stock is issued — and therefore no money is raised. However, existing investors and insiders can trade their shares on the open market.
But because Spotify is eschewing Wall Street banks to manage the raising of new capital, the listing could face a rockier reception in the markets. Those banks typically spend weeks assessing investor demand for a company’s shares and try to match the amount that hits the market to ensure the shares are supported.
According to the prospectus, investors trading Spotify’s shares in private transactions have valued the company as highly as $23 billion. Spotify’s shares will be traded under the ticker symbol SPOT, but there is no indication of when that will begin.
The company, showing no shortage of ambition, said that its mission was “to unlock the potential of human creativity by giving a million creative artists the opportunity to live off their art and billions of fans the opportunity to enjoy and be inspired by these creators.”
For the music industry, Spotify — and the streaming model it has championed — has been a powerful engine. After more than a decade of decline, the global music market began to turn around in about 2015, just as streaming began to take hold.
In the United States, for example, streaming now accounts for about two-thirds of recorded music revenues, according to the Recording Industry Association of America, and streaming platforms like Spotify, Apple Music, YouTube and SoundCloud have become the new outlets where stars develop and hits are minted.
Even so, many artists remain skeptical of the streaming economy, which heavily rewards mainstream hits but has drawn complaints from other songwriters and musicians, particularly those outside the sphere of pop, who feel they are not being adequately compensated for their work.
Spotify’s prospectus is the most detailed disclosure the company has given about its business.
According to the filing, Spotify, which began its streaming service in Sweden in 2008 and came to the United States three years later, had nearly $5 billion in revenue in 2017, up 38.6 percent from the year before. In 2016, it had grown by 52 percent.
By the end of 2017, Spotify, whose full name is Spotify Technology, had 159 million active users, including 71 million who pay for subscriptions; the rest, using the “freemium” model that has become Spotify’s marketing hallmark, get free access to music but are subjected to advertisements.
As quickly as Spotify has grown, though, so have its losses. Last year, it had a net loss of $1.5 billion, up from about $650 million the year before. Its largest expense, by far, is the cost of licenses from record companies and music publishers.
The prospectus also highlights Spotify’s successes, and its value to the music industry. Through the end of last year, the company had paid more than $10 billion in music royalties since its inception, and its “churn” — a measure of how many paying users cancel each month — has been steadily declining, to 5.5 percent in 2017 from 7.7 percent in 2015.
The largest stakes are owned by its two founders: Daniel Ek, the chief executive and the company’s public face, and Martin Lorentzon, who holds no executive position. In addition to their shares, they also have “beneficiary certificates” granting then extra voting rights. In total, Mr. Ek has 37.3 percent voting power over the company, and Mr. Lorentzon 43.1 percent, according to the prospectus.
The major record labels also own minority stakes in the company, as a result of licensing deals struck over the years. Sony has the largest, with 5.7 percent; the others were not disclosed.
Spotify’s major competitor is Apple, whose co-founder Steve Jobs had long disdained music subscriptions. Apple finally entered the streaming subscription business in 2015 with Apple Music, and recently said that it had 36 million paying users. But according to a recent report in The Wall Street Journal, Apple Music has been outpacing Spotify in its growth in paid subscribers in the United States.
The market for public offerings has been robust so far this year. Through late February, 30 companies listed their shares publicly on markets in the United States, raising $11.4 billion from investors. That was the strongest annual start for the market since 2000, according to data from Thomson Reuters.
At least some of the highly valued, privately held technology companies, known as unicorns, could move quickly to capitalize on the opportunity and sell shares publicly.
Last week, for instance, the online file storage company Dropbox, valued by the private markets at about $10 billion, filed paperwork to raise up to $500 million in an initial public offering.
But to convert that paper wealth into actual cash at top dollar, early-stage investors, company founders and employees with stock options need receptive public markets to buy their shares.
If the public investors do not think the companies are worth as much as the small number of deep-pocketed investors who dominate the private markets, it could mean the large amounts of paper wealth could be vaporized once the company’s shares start trading.
That’s effectively what happened last year, when some prominent public offerings fizzled once the shares were trading publicly. Shares of Snap, the start-up behind the popular Snapchat app, surged when it went public last March, but it has since had difficulty staying above its offering price of $17 a share. And the meal-delivery start-up Blue Apron, which went public at $10 a share last June, is now trading at less than $3 a share.
Given that it involves a direct listing, Spotify’s debut on the public markets has the potential to be even more volatile.
