Spotify goes public later today. What does the direct listing mean for the company?

It’s going to be an unpredictable trading Tuesday for Spotify’s investors as the company today goes public with its unconventional direct listing. How Spotify’s shares perform today will dictate the tone for the company’s future.

Spotify goes public later today. What does the direct listing mean for the company?

In an emotional letter published yesterday ahead of its New York listing, CEO Daniel Ek explained his vision for the company.

“Nothing ever happens in a straight line – the past ten years have certainly taught me that,” Ek wrote. “My job is to ensure that we keep our foot on the pedal during the ups, so that we don’t become complacent, and that we continue to stay the cause with a firm grip on the wheel during the downs.”

He went on to say that: “What’s even more important to me is that tomorrow does not become the most important day for Spotify. It’s the day after and the following day that matters- and all those days to come. Because that’s when we will continue the hard and important work of our mission: 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 it.”

Currently, analysts are forecasting that the music streaming giant will be valued at $20 – $25 billion (£14 billion – £17 billion). The uncertainty about the company’s direct listing, considering a company of Spotify’s size has never attempted one before, will likely cause huge volatility in Spotify’s shares. This is made even more turbulent when investors consider that Spotify has never before turned a profit.

In any case, we’ll be keeping an eye out on how Spotify’s momentous listing fares. Read on to find out why a direct listing is so unprecedented and what it could mean for Spotify.

The original piece continues below

In a bid to take on Apple and Amazon, the largest music streaming giant, Spotify, has officially filed for an initial public offering (IPO) on the New York Stock Exchange – and it’s asking for a lot. 

Becoming the first company ever to file for a direct listing of up to $1 billion on Wednesday, the Swedish company is still struggling to make money from its pioneering music streaming platform. Spotify has more than 71 million paying subscribers, but 159 million more use the free, ad-supported service. 

 In 2017, the company brought in a large revenue of €4.09 billion (£3.6 billion), that’s significantly more than the €2.95 billion (£2.6 billion) that it made in 2016 yet the company is still failing to break even, years after the streaming service first launched. With operating costs up year-on-year, from €349 million (£309 million) in 2016 to €378 million (£335 million) in 2017, Spotify needs this public listing. According to CNBC, the company could be worth as much as $23 billion (£1.6 billion) if private shares trading is anything to go by.

In fact, Spotify’s decision to make a, let’s say, unconventional, direct listing speaks volumes. With the listing, Spotify won’t have to go through the brouhaha of dealing with an investment bank, finding new share issues and most importantly, won’t have to be underwritten by a Wall Street broker. It’s most certainly a simpler way to bring in cash, but with that brings in its own risks.

As Fortune reports, direct listings have, since now, been an extremely rare occurrence and have only been made by small-cap firms, often with a biotech background. What’s even more noteworthy is that they’ve all had direct listings of under $100 million. In the past, direct listings only took place on Nasdaq, but the New York Stock Exchange has recently begun allowing them. Direct listings are risky because there isn’t a buffer against volatility and the companies receive no support from bankers if a deal is made.

It’s no secret that diving into the business of music streaming is tricky, what with companies having to juggle monetary partnerships with music record labels. In fact, more than 70% of Spotify’s expenditure goes to paying record labels royalties, but it’s not just that. As Spotify writes in the filing: “Apple and Google also own application store platforms and are charging in-application purchase fees which are not being levied in their own applications thus creating a competitive advantage for themselves against” the company.

“Our current and future competitors may have higher brand recognition, more established relationships with music and other content licenses and mobile device manufacturers, greater technical and other resources, more technologies and/or more experience in the markets in which we compete.”

While the big three companies have dedicated smart speakers for streaming from their own streaming services: Apple’s HomePod, Amazon’s Echo and Google’s Home Speaker,Spotify doesn’t – although if a job listing is anything to go by, it may do very soon. 

In any case, this direct listing filing should theoretically give Spotify the investment it needs. But it’s also paved the way for small-scale start-ups to list directly on the New York Stock Exchange. Because if Spotify’s doing it, why not anyone else?

Image: Shutterstock

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