Morning Report: Spotify’s Subscriber Number Spikes As Pandora Pares Down To Stay Alive

July looked like a good month for the digital music space. According to Hypebot, Spotify surpassed 60 million paying subscribers, up from the 40 million paid users it reported at the end of March. At this pace, Spotify is acquiring five million paid subscribers per month, compared to the five and a half years it took to reach 10 million subscribers from launch.

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In the midst of its growth, rumors of Spotify going public have swirled for months. Instead of a traditional initial public offering (IPO), Spotify is considering doing a direct listing either later this year or in early 2018.

Unlike a traditional IPO, a direct listing, another way of going public, lets investors buy shares on the open market and does not set the share price beforehand.

Consulting our friends at TechCrunch, there two key reasons that may have contributed to Spotify choosing direct listing over a traditional IPO:

Direct listing allows a company to go public faster, skipping the underwriting process, while enduring fewer regulations, and throwing the “lock-up” period (a certain amount of time after IPO during which shareholders are restricted from selling their shares) out the window. Spotify can then create liquidity faster for its employees and investors. On the downside, Spotify misses the opportunity to raise capital at IPO.
In traditional IPOs, many companies struggle to maintain the initial share price, as in the case of Snap. Based on its volatile financials, Spotify does not have to reprice and avoids fluctuations in share prices through a direct listing.

Meanwhile, the already-public streaming service Pandora is wallowing in Spotify’s wake.

Despite Pandora’s Q2 2017 earnings showing 10 percent growth (YoY), dependence on the metric as indicative of Pandora’s current state is overly optimistic.

Just last month, Pandora appeared to be short on cash. It responded by selling Ticketfly, which it acquired in October of 2015, to Eventbrite for $200 million. Also, thanks to a timely $480 million investment by Sirius XM in the same month, Pandora was able to keep its business running. Chaos continued through the end of June when Pandora’s co-founder and CEO Tim Westergren stepped down. President Mike Herring and CMO Nick Bartle also announced their exit from the company around the same time.

Yesterday, Pandora officially shut down its services in Australia and New Zealand, its only two international operations. The move makes sense, allowing the company to conserve cash for tackling its home market and its domestic competition.

How Spotify Gains the Upper Hand

Spotify, though still a private company, has taken the lead over its public rivals. Available in approximately 60 countries, Spotify is seven times bigger than Pandora in terms of subscribers. Making that point: Spotify’s recent 60 million paid subscribers overshadowed Apple Music’s 27 million (as of June). Granted, Apple Music launched seven years later than Spotify, but time of founding may not be the best metric since Spotify came out eight years later than Pandora.

Adding to its momentum, Spotify is striking new deals with record companies. In April, Crunchbase News covered Spotify’s new agreement with Universal Music Group, which allows premium-tier users to listen to new albums two weeks ahead of nonsubscribers; simultaneously, Spotify picked up an exclusive reduction in royalty rate. This July, Spotify signed a new deal with Sony Music and is close to signing another fresh contract with Warner Music. These deals are crucial to keeping Spotify afloat in the expensive world of licensing fees, while also, in some cases, providing an incentive for free users to upgrade.

Even though Spotify suffered almost double the net loss this Q2 compared to last year’s, the percentage of operating loss as part of its revenue decreased over time. Perhaps, with the growing number of paid subscribers and music label deals, Spotify will finally pull off an IPO.

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