Coverage: Spotify files to go public amid big losses

Music streaming service Spotify filed to go public Wednesday on the New York Stock Exchange, but its documents showed huge financial losses that may scare investors.

Ben Sisario of The New York Times has the story:

The company, showing no shortage of ambition, said that its mission was “to unlock the potential of human creativity by giving a million creative artists the opportunity to live off their art and billions of fans the opportunity to enjoy and be inspired by these creators.”

For the music industry, Spotify — and the streaming model it has championed — has been a powerful engine. After more than a decade of decline, the global music market began to turn around in about 2015, just as streaming began to take hold.

In the United States, for example, streaming now accounts for about two-thirds of recorded music revenues, according to the Recording Industry Association of America, and streaming platforms like Spotify, Apple Music, YouTube and SoundCloud have become the new outlets where stars develop and hits are minted.

Even so, many artists remain skeptical of the streaming economy, which heavily rewards mainstream hits but has drawn complaints from other songwriters and musicians, particularly those outside the sphere of pop, who feel they are not being adequately compensated for their work.

Michelle Castillo of CNBC.com reported that the company has never made a profit:

Although the company has been able to negotiate better licensing deals with record labels, those are still very costly. Rights holders — labels, songwriters and publishers — get payouts that are tied to a portion of revenue, and as of December 2017 the company said it has paid out $9.76 billion in royalties to “artists, music labels and publishers.”

If that seems like a lot, publishing companies and songwriters don’t think so. They aren’t pleased with the current payment split, saying basing royalties on revenue doesn’t make sense. Many tech companies look at their music divisions as a way to boost revenue for their main business, and aren’t concerned about turning a profit there, the publishers and songwriters argue.

In late January, U.S. copyright royalty judges — known as the Copyright Royalty Board (CRB) — sided in favor of publishers and songwriters and agreed to boost the rate for interactive streaming by more than 43 percent over the next five years.

Some have also taken issues with how Spotify licenses music. A $1.6 billion lawsuit from Wixen Music Publishing, for example, claims the company was using thousands of its songs illegally. The lawsuit is still pending in a California federal court.

Theodore Schleifer of Recode reports that its debt is forcing the public offering:

Two Spotify shareholders, TPG and Dragoneer, held what’s known as a convertible debt note that entitled them to more and more shares in the company if Spotify kept delaying its public listing. Working closely together, the pair late last year was able to convert that debt into equity and then sell their shares to Tencent, the Chinese internet giant eager to gain more of a foothold in the music company.

Spotify’s documents on Wednesday reveal how exactly that went down — in three batches:

• First, in December 2017, TPG and Dragoneer sold about $300 million of their debt to Tencent for about five million shares in the company — which they promptly flipped to Tencent (at about a $20 billion valuation, meaning Tencent could lose money.)
• Then, later that month, they sold another $110 million in a similar transaction. But there’s no indication that those shares were sold to Tencent.
• And finally in January — likely after our first story — the remaining $628 million of debt was sold for about 9.5 million shares. Presumably, TPG and Dragoneer still hold those.

Spotify says in the filing that it now has no outstanding debt. But here’s the kicker: If Spotify didn’t go public by July 2 of this year, the filing says, then Spotify “agreed to offer to each noteholder the option to unwind the transaction” and issue new convertible debt notes.