Spotify Shares Still Below IPO Price: The Honest Broker


This isn’t an funding recommendation column, however perhaps it must be. After my recent gloomy—but accurate—prediction about Netflix, somebody requested me if I had shorted the inventory. No, I didn’t, however that will have been a wise commerce. But I hate to earn a living on another person’s misfortune.

Which leads me to the topic of Spotify, a enterprise that has delivered loads of ache and struggling to musicians. And, extra lately, to its shareholders.

I need to make some predictions about the way forward for Spotify, however first let me revisit what I stated 4 years in the past, when the corporate determined to listing on the inventory change. Here are the important thing factors, as I noticed them in early 2018.

Not solely was the prediction proper, however even the timeline. I advised that Spotify may thrive for an additional 24-36 months, however the issues can be apparent by that time.

With that prediction in thoughts, let’s take a look at what’s occurred since Spotify’s itemizing on the inventory change. As you’ll be able to see, the shares hit their peak worth at exactly 24-36 months after the IPO—however since that point have collapsed a staggering 70%. The shares at the moment are buying and selling beneath the unique providing worth. By comparability, US shares as a complete are up virtually 40% over that very same interval. 

Spotify Stock Price Chart Since IPO

This could also be a shock to some folks, however clearly a number of giant shareholders had a hunch that this decline was coming. At the time of the general public providing, a number of giant file labels had been shareholders of Spotify—however (shock!) Sony and Warner Music quickly dumped most of their shares. Universal Music continues as a shareholder and nonetheless owns round 4% of Spotify, however clearly ought to have offered earlier than the 70% collapse.

I don’t anticipate Spotify to go bankrupt. Despite my gloomy prognosis, I’ve by no means predicted that this firm will disappear. In a approach, that’s a disgrace. The music ecosystem would most likely be higher off with out Spotify and different predatory streamers. 

The drawback from the beginning wasn’t that Spotify isn’t able to producing money. Instead the actual challenge is that streaming won’t ever generate sufficient money to make all of the stakeholders pleased. 

The inventory market’s detrimental response to the corporate’s latest quarterly report displays this painful fact. It’s laborious to search out new subscribers these days, however the actual anxiousness amongst buyers is the awful revenue margin at Spotify. The gross revenue margin was 25.5%—maybe acceptable for a run-of-the-mill enterprise however disappointing for a dominant tech platform. Even worse, Spotify informed buyers that they don’t anticipate margin enchancment within the present quarter. 

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By comparability, the gross revenue margin at Microsoft is round 70%. The identical is true at Pfizer. At Facebook it’s even increased—regardless of all Mark Zuckerberg’s strategic blunders, the gross revenue margin is 80%. Spotify shareholders have been much less formidable, however even they had been hoping for a margin within the mid-30s. But with greater than 400 million energetic customers, Spotify nonetheless can’t pull it off. 

The actuality is that somebody must get squeezed for streaming platforms to hit their monetary targets—and people cries of anguish you hear from musicians studying their newest royalty statements is what that squeezing appears like.

The blunt truth is that music streaming isn’t very profitable. And may never be under the current business model. 

After all, Spotify needs to pay publishers, composers, record labels, and all its thousands of executives and employees. Then there’s all the other operating costs—rent, computers, bandwidth, etc. Oh, don’t let me forget the musicians—they should get a few crumbs from the table. 

But it’s just crumbs. The decision to set a low monthly price for streaming was designed to accelerate adoption, but the cash generated just isn’t enough. And it’s a law of business that the most powerful interests will end up with the lion’s share. 

It was obvious from the start that musicians would suffer the most, because they have the least power—and, for the most part, don’t even know what deals have been made between streaming platforms and labels. Of all the stakeholders, they are the most fragmented group, incapable for a variety of reasons of taking genuine collective action. And although their creativity is the original source of all the cash generated by the business, they almost never sit at the bargaining table when deals are done.

So I don’t expect their prospects to improve under the current regime. 

Here’s the bottom line on Spotify:

That original pricing strategy (under ten bucks per month for unlimited access) was made in order to shift the market from owning music to streaming it. This was an attractive deal, and it inevitably convinced most fans to give up their physical albums. But from a business perspective, this approach only works if you have the most optimistic—and unrealistic—estimates for subscription numbers. What investors are starting to realize is that projections of that sort are out of touch with the current reality, in which even the most successful platforms may be facing declining user numbers

Here’s what the New York Times lately wrote on this topic:

“Is there such a thing as too many streaming options? How many people are really willing to pay for them? And could this business be less profitable and far less reliable than what the industry has been doing for years?”

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The projections had been fallacious from the beginning, for my part. The most weird truth right here is that file labels—traditionally gradual to embrace new applied sciences—jumped on the streaming bandwagon earlier than it had confirmed that it may pay all of the payments, and nonetheless generate affordable income. 

The music trade acted out of desperation, not knowledge. They had ignored the Internet for years, maybe hoping it would simply go away. But after they realized, to their shock and disappointment, that their traditional methods of litigation, lobbying, and laws didn’t kill digital music, they began to function out of worry. They purchased into streaming with little concept of the place it will lead, or how a lot money it will generate. 

That was a mistake. 

Here are the precise quarterly figures for ‘free cash flow’ at Spotify. You will discover that the numbers have been going within the fallacious path. That shouldn’t be a shock. When you give folks limitless streaming for lower than ten bucks a month, you’re working on a razor skinny margin, and ugly surprises are possible. 

Spotify Quarterly Free Cash Flow

2022-06-30 64.92
2022-03-31 30.30
2021-12-31 326.54
2021-09-30 204.00
2021-06-30 90.37
2021-03-31 49.43
2020-12-31 206.76
2020-09-30 127.42
2020-06-30 4.40
2020-03-31 -23.17
2019-12-31 490.56
2019-09-30 296.90
2019-06-30 249.53
2019-03-31 195.36
2018-12-31 258.64
Source: Macrotrends

I be aware that these money move figures are in hundreds of thousands, not billions. In different phrases, for all its dimension and dominance, Spotify generates much less money than a single hit film or online game. 

I’m not stunned that Spotify has labored so laborious to search out different sources of progress exterior of music. The irony right here is that the streaming platforms are the only largest cause why recorded music is such an unpleasant funding space proper now. That’s why you would have predicted again in 2018 that Spotify would spend money on podcasts, and different non-music classes. This additionally explains why streaming platforms is perhaps so wanting to showcase so-called ‘fake artists’—particularly if the musicians are prepared to surrender most or all of their royalties in work-for-hire preparations. 

But it doesn’t matter what Spotify streams, the corporate wants subscribers. And the very actions Spotify has taken contribute to shoppers’ declining curiosity in new music. A crappy interface with mediocre audio high quality that gives virtually no info on musicians will inevitably result in declining fan loyalty—and so it’s no shock that, when the financial system will get in a decent spot, folks cancel music subscriptions.

Spotify’s makes an attempt to channel listeners into music that’s extra worthwhile to them (e.g., work-for-hire tracks from unknown artists) results in the identical finish consequence. This is just like the well-known desk of latest books on the entrance of the Barnes & Noble retailer—the place the corporate has the selection of displaying the books folks will get pleasure from probably the most, or as an alternative that includes choices from publishers prepared to pay for placement. Every time an organization decides to steer shoppers intentionally to inferior merchandise due to behind-the-scenes monetary incentives, they undermine their very own enterprise mannequin. It might present a short-term increase however, ultimately, ends in declining buyer loyalty. 

Where can we go from right here?

It could also be too late to repair Spotify’s issues. When the corporate began, it may have pursued a technique of charging extra monthly, and providing a better high quality platform—with all of the bells and whistles that will get shoppers enthusiastic about music. That strategy would have resulted in a smaller firm, however most likely a extra worthwhile one—with extra money for musicians and different stakeholders. But they took a unique path, with a cut-rate choice at an inexpensive worth. The inevitable result’s that, a decade later, most shoppers don’t suppose music is value a lot. 

A greater resolution—which nonetheless may occur—is for sensible, visionary individuals who care about music to supply a superior different to Spotify. This different would earn the loyalty of people who find themselves true music lovers. And there are tens of hundreds of thousands of individuals like that, perhaps even lots of of hundreds of thousands. 

Spotify could be bypassed. A brand new participant may study from the apparent flaws of their providing, and provides us one thing higher. Or extra music-focused smaller firms on the present panorama (Bandcamp, Qobuz, Tidal, even a Discogs or CD Baby or a blockchain firm) may discover a solution to tackle the massive gamers. The present disillusionment within the monetary neighborhood with streaming may make that much more possible. 

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So don’t quit hope. We nonetheless may get one thing higher than the present streaming mess. If and when that occurs, I might be an early adopter.


Ted Gioia is a number one music author, and creator of 11 books together with The History of Jazz and Music: A Subversive History. This article initially appeared on his Substack column and publication The Honest Broker.

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