Spotify Goes Public Valued At Nearly $30 Billion – But Its Future Isn't Guaranteed : The Record Spotify's much-anticipated debut on the New York Stock Exchange arrived today — but the company has never made a profit. To do so, it needs to predict, and define, the future.
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Spotify Goes Public Valued At Nearly $30 Billion – But Its Future Isn't Guaranteed

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Spotify Goes Public Valued At Nearly $30 Billion – But Its Future Isn't Guaranteed

Spotify Goes Public Valued At Nearly $30 Billion – But Its Future Isn't Guaranteed

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MARY LOUISE KELLY, HOST:

Spotify went public today. It is the world's most popular music streaming service. Shares hit the market midday at $165, then drifted down to close at just under $150. That gives Spotify an overall value of about $26 billion - not bad for a company that does not have a clear path to making a profit. Charles Lane from member station WHSU reports.

CHARLES LANE, BYLINE: Spotify brings in almost $5 billion a year, but it pays out 79 percent of that to record labels, producers, songwriters and artists. David Pakman is a venture capitalist who has run several digital music companies. He says there's just not enough left over to make a profit.

DAVID PAKMAN: It's a business that's never made money, and I think it's just unlikely to ever make money, which is a shame because it's an incredible service.

LANE: Pakman says the problem is that so much music is controlled by just a handful of companies.

PAKMAN: They're at the mercy of the record labels who are really in control of Spotify's long-term economic success.

LANE: Last summer, Spotify renegotiated with the record labels in an effort to reduce what it pays in royalties. The labels agreed, provided that they could keep certain albums behind paywalls and as long as Spotify met certain benchmarks. The main point of contention is how few Spotify users actually pay for the service. Nearly two-thirds of listeners use the free version, which is supported by ad revenue. But advertising only amounts to a paltry 10 percent of Spotify's revenue. Richard Burgess heads the American Association of Independent Music.

RICHARD BURGESS: When you look at the revenue from the ad-supported section of the service, it pales into insignificance compared to the subscription payments.

LANE: This is the chicken-and-the-egg problem. Spotify can't grow unless it offers a free version, but that doesn't generate enough cash for the labels or Spotify. The record labels, on the other hand, don't like to give away music but very much need a music streaming service like Spotify to succeed. Skeptics like Pakman call this an unhealthy co-dependency, but Burgess and others in the industry are optimistic Spotify can be profitable eventually.

BURGESS: We need to find that sweet spot between a price that still works for the labels but doesn't crush the streaming services and does encourage them to grow.

LANE: For competing services like Apple Music or Amazon Music, not making a profit on music is OK because they have plenty of other profitable products; Spotify doesn't. The company has tried to branch out into video and podcasts, but the real profit might lie somewhere else - replacing the record labels. Mark Mulligan is an industry analyst for the investment research firm MIDiA.

MARK MULLIGAN: You know, record labels used to decide what we listen to. They would decide what songs would end up on the radio and the TV and got released when. But all of that is changing, and Spotify is dismembering the albums, if you like, and taking the best bits, cherry-picking the killer tracks, putting them onto playlists, deciding what goes where, using its data to help inform those decisions, and that use of soft power is really terrifying for the record labels.

LANE: Spotify has invested heavily in artificial intelligence. The company says almost a third of all listening is chosen not by users but by Spotify and its algorithms. It's a significant change that undermines the role record labels have traditionally played, but Mulligan says this new business model opens the doors for new investment into the industry. Those doors have been shut for the last 20 years, ever since people first started pirating music on the Internet, but that could be changing today.

MULLIGAN: Now is the time whether we find whether the rest of the marketplace feels as confident with the music business as the music business does itself.

LANE: It will likely take at least a few months for Spotify's stock price to stabilize. Once it does, the major record companies will have to decide how to position themselves and what to do with the roughly 16 percent stake they took in Spotify. The companies have said they will share the windfall with the artists, but there's nothing in the standard contracts that says how much, if at all. For NPR News, I'm Charles Lane.

(SOUNDBITE OF BUSTA RHYME SONG, "CALM DOWN")

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