Spotify's Next Investors May Face The Music

The next investors of Swedish streaming-music service Spotify may face the financial music, according to Reuters Breakingview columnist Jeffrey Goldfarb. http://blogs.reuters.com/breakingviews/2016/05/26/spotifys-next-investors-may-face-the-music/ Spotify competes with Pandora Media Inc

and Sirius XM Holdings Inc.

in a competitive market. Despite 90 million subscribers (out of which 28 million are paid subscribers) and close to $2 billion in annual revenues, the service runs at a loss. Goldfard said "even assuming generous growth and operating leverage in the future, though, it may be hard to justify a higher valuation than its most recent one." According to Goldfard, Spotify is facing a common problem for digital music startups -- spending most of its sales on royalties and distribution fees. Spotify paid 84 cents of every dollar last year, even higher than the 60 cents paid by Pandora. "Because Spotify is losing money, there's a tendency to accept non-standard methods of assessing its value. For example, the firm – whose June 2015 fundraising imputed an $8.5 billion valuation – is now worth more than four times revenue, a multiple on par with the $20 billion U.S. satellite radio company Sirius XM, a more established business that generates higher sales per subscriber," the columnist continued. Maybe Spotify expects to pay even less to musicians and their labels, while eyeing new sources of revenue, perhaps ones with higher margins. "A $1 billion convertible bond Spotify issued earlier this year gives it firepower for acquisitions and investment. The terms also put it under greater pressure to go public soon. That may be when it faces the financial music," Goldfard concluded.