Why Spotify is simply not worth 8 Billion

Investors may have valued the company at more than $8 billion but I don't and here's why.

Posted by Nelo on Wed Jul 20, 2016

Music News

Talk has heated up once again about the long awaited IPO for Spotify, with Bloomberg sources suggesting it could happen in the latter half of 2017. It isn't surprising as those who got in early are probably pretty eager to cash out but the 8 Billion Dollar valuation being thrown around is ludicrous. 

Sure Spotify has 30 million customers forking out $10 a month for a library of millions of songs, last year sales brought in a whopping $2.2 billion. Indeed that sounds like they planted a money tree and Autumn will never end but here's the catch, last year Spotify payed commissions to the music industry of an astounding $1.8 billion. That equates to 55 percent of sales. Ouch. Now Spotify had been negotiating hard with the labels to prune this percentage down to 50 but they don't have a pot to piss in, why you might ask? Because the other major player in town Apple pays labels 57.5 percent of sales from their Apple Music service. That doesn't give the labels much of an incentive to give Spotify special treatment.

But there's 400 million left on the table!?!? Yeah not too shabby but that money gets easily gobbled up, for example, Spotify spent $250 million on research and development last year. That's a hefty sum allocated to improving user experience, song matching, etc. No offense to Spotify engineers but they can throw all they money they want into R&D and still be scoffed at by the talent and resources Apple has at their disposal. This doesn't take into account the real dark horse, Amazon.

Amazon Prime Music has grown in leaps and bounds over the past couple of years. Not only have they massively expanded their catalog but by including the service as part of their Prime subscription they have a user base that's growing at an absurd rate. That growth will only accelerate as prime takes hold in new markets. The combined reach of Apple and Amazon is a real threat to the growth of Spotify. While the Swedish company will need to burn cash to attract new subscribers, Apple and Amazon will see customers fall into their laps. What's more both the big A's have a huge advantage with their devices in customers hands. Take the much loved Amazon Echo. I personally never bothered with a music subscription service nor had I bought music in years until the Echo landed on my desk. I now have two, the original unit and a Echo Dot hooked up to some nasty (in a good way) Bluetooth speakers in my bedroom. Now I'm a constant user of Amazon Prime Music. You'll hear me yelling at Alexa with song requests all hours of the day and when she doesn't have a song I want in the existing library, just a couple of words uttered purchases it. 

Apple and Siri will soon catch up. It's a revolutionary way of interacting with your music library and one I predict will be ubiquitous in a couple of years time. Spotify were quick to jump on the Echo bandwagon and integrate their service with the device but as Amazon prepares to unleash Echo across the globe they will pull in a massive number of new users to the Prime Music Service and once hooked it'll be hard to see them swapping.

Really I can't see Spotify growing at the same rate the investors have predicted, they might not even be in such a dominant position as they are now once the IPO goes through. In addition to music they are keen to get a leg into the video race but both Amazon and Apple are already there. I cannot see them making any real impact in such a crowded field. Who knows that other successful streaming service Pandora might have plans of their own. Just imagine Pandora rolled into bed with Netflix with over 80 million existing subscribers? I'm not saying its going to happen but that would be a major blow to Spotify. 

I haven't even mentioned some of the other players in this market: Google Play, Rhapsody or Tidal. Anyone else feeling a bit claustrophobic? I applaud Spotify for their success, they convinced people to pay for music at a time when the industry was financially crippled. It's too bad that their IPO is coming a little too late and absurdly overpriced. 

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