Is Spotify Setting the Stage for an IPO?

Source: Spotify

Source: Spotify

Music streaming service company Spotify could be looking to access the debt market in a big way. People familiar with the matter tell Bloomberg that Spotify has engaged Goldman Sachs Group Inc. (NYSE:GS), which is also an investor in the company, in talks about raising a credit facility.

The news has fueled speculation that Spotify is gearing up to announce an initial public offering. Spotify’s peer group appears to include Internet and technology startups like Facebook, Inc. (NASDAQ:FB), Twitter, Inc. (NYSE:TWTR), and Zynga, Inc. (NASDAQ:ZNGA), which all sought credit facilities shortly before their own IPOs. In the eyes of many on Wall Street, Spotify falls into the same bucket these companies did before they were bankrolled by the public market.

Spotify Co-Founder and CEO Daniel Ek (who is just 30 years old) championed Spotify’s image as a high-octane tech and Internet startup in an August 2013 interview with the Wall Street Journal. Like its peer group at this stage, Spotify has hemorrhaged cash, reporting loses of $72 million on $576.4 million in revenue in 2012. Further like its peer group at this stage, the losses haven’t fazed the venture capitalists. A fundraising round at the end of 2013 valued the company at $3 billion, losses and all. Along with Goldman Sachs, Spotify counts Hong Kong billionaire Li Ka-shing among its investors, as well as former Facebook president and Napster co-founder (also a billionaire) Sean Parker.

The inevitable question of monetization didn’t faze Ek. When asked, Ek said that, “The focus hasn’t really been about when we’re going to show profitability. I think a lot of people just look at the financials and say: ‘Oh wow, losses, that’s really, really bad.’ That’s not at all how we see it, we see that we‘ve actually now proved our business model. The difference between what we pay out in royalties and what we actually take in in revenue is increasing, which is positive. [And] we believe that fundamentally this is a huge market.”

The market is, indeed, huge. It’s so big in fact that it’s populated by competitors like Amazon.com Inc. (NASDAQ:AMZN), Google Inc. (NASDAQ:GOOG), Apple Inc. (NASDAQ:AAPL), and Microsoft Corp. (NASDAQ:MSFT). These companies have been trying to figure out the digital music market for decades, and have only experienced mixed success. Spotify CEO Ek argued to the Wall Street Journal in 2013 that if the giant giants were going to put Spotify out of business, they would have figured out how to do it already.

“Apple has done a lot of things — they’ve included scan and match, they’ve started doing some streaming on their albums, they’ve started doing iTunes radio,” Ek told the Wall Street Journal. “Microsoft actually has mimicked our model. It’s a free service bundled to every Windows 8 computer that you can buy. Everyone has had music services for a good while, so Microsoft has theirs, and they’ve had it for two years, and when that was supposed to launch, everyone said, ‘That’s going to kill Spotify,’ but we’re doing better than ever. Google actually has had a music service also for years.”

If Ek’s optimism is well placed, then Spotify stands to join the ranks of Internet start-up successes like Facebook — and investors appear eager to satisfy their appetite for risk should the company IPO. Spotify reportedly hired a U.S. financial reporting specialist at the end of February, which intensified speculation over the IPO. Ek has played down rumors related to a possible IPO, but that’s standard practice. The stark differences between Twitter’s IPO and Facebook’s IPO suggest that staying humble and quiet about expectations is more prosperous track to follow.

Spotify appears to be gaining momentum, too, which is good timing for an IPO. The company recently unveiled a new free mobile app, announced an expansion to 20 more countries, and gained exclusive access to stream Led Zeppelin’s catalog. The mobile Spotify app was formerly only available to premium subscribers who paid $10 per month for ad-free listening. Now, free users can access the app on their smartphones and tablets running iOS or Android.

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