Investors are finally getting a crack at the resurgent music business.
Spotify, owner of the world's largest paid music service, plans to begin trading on the New York Stock Exchange this quarter, passing up a traditional public offering for what's called a direct listing. The debut will test whether investors are ready to buy into the music industry, which was left for dead just a few years ago.
Record industry sales have increased for three years in a row thanks to the legions of consumers paying to listen on Spotify and Apple Music. Their spending has far outstripped shrinking album sales in retail outlets and online stores like iTunes, allowing the US$15.7 billion ($22b) global business to prosper again after years of decline. Analysts project revenue could more than double over the next decade.
Investors have few direct opportunities to tap this potential growth. All three major music companies are part of larger concerns or closely held. Vivendi owns Universal Music, while Sony Music is part of the Japanese media and tech conglomerate and billionaire Len Blavatnik owns Warner Music. Music accounts for a small share of business for the industry's biggest retailers, like Apple and Wal-Mart Stores.
Spotify built the most popular on-demand music service in the world, outflanking the largest technology companies, including Apple. The company has signed up more than 60 million subscribers and is trying to prove a music service can prosper without being a vehicle to sell mobile phones or other products.
"If you look at the leaders in each form of media, music is the last uncaptured sector," said Rohit Kulkarni, an analyst at SharesPost Inc. "Players 30 times bigger than Spotify took stabs at it, but none has won."
Newfound optimism about the future of the music business has boosted the value of catalogs in recent years.
Kobalt Capital raised US$600 million to buy music rights in November and promptly agreed to acquire the collection of Songs Music Publishing for about US$150 million. Imagem, which holds rights to 250,000 songs including Daft Punk, Pink Floyd and Stravinsky, was sold to Concord Bicycle Music in a deal Billboard valued at US$600 million.
Vivendi, the French media company, has weighed a public offering of Universal Music, the world's largest music company, to tap investor enthusiasm.
For now though, Spotify is the biggest opportunity. The company was valued at US$8.5 billion when it raised money in March 2016, and has since been pegged at more than US$15 billion.
A direct listing, usually done by much smaller companies, is risky, and Spotify is trying to pull off the biggest one ever. Most would-be stock issuers hire investment bankers to underwrite their shares and go on a roadshow where they raise money by touting their future to potential investors.
Spotify isn't trying to raise capital. It's seeking a listing so existing investors can begin selling their shares. Without the roadshow, the company and its bankers won't have much control over where the shares begin trading or as much insight into the thinking of investors.
"There is no example of a successful music-streaming service from a financial standpoint," said George Howard, co-founder of TuneCore and Music Audience Exchange, and associate professor at the Berklee College of Music.
Spotify believes it is well-known, and investors can also look at limited financial results that have been posted publicly. Yet the company isn't a sure bet. Music industry growth could slow, and the company can't predict how many people worldwide will pay for a service.
Pandora Media, an online radio service, went public in June 2011 at US$16 a share via a traditional offering. The stock peaked above US$40 in March 2014 but now trades below US$5, felled by accumulated losses and management turmoil. The shares were little changed at US$4.94 in afternoon trading in New York.
Spotify lost US$601 million in 2016, thanks largely to contracts that require it to pay the majority of its sales to music rights holders. High content costs hampered Pandora before it began losing customers.
Spotify has since negotiated new contracts with major music companies that reduce its costs provided it reaches certain performance targets. Those deals have improved its margins, according to Kulkarni, who says the only clear threat to the company is Google's YouTube, which is itself developing a paid subscription service.
"Spotify is the only reason for hope in the music business," Kulkarni said.