Spotify, the music streaming service made in Sweden first shares were launched yesterday on the New York Stock Exchange under the name “SPOT”. Within only a day, the share closed at 149 dollars, up 12 percent from the initial price share of 132 dollars. It went up to 165 dollars, three hours only after the NYSE’s opening.
Although the international press praised this outstanding performance, analysts seemed a bit skeptical on Spotify’s long term business model’s sustainability. Founded 12 years ago, its economical structure based on a freemium business model, where most of its users – and a growing number of users – have free subscriptions.
Marking a first in direct listing
Spotify made its debut on New York Stock Exchange using a direct listing to launch its shares, contrasting with other traditional IPOs. In other words, only professionals and investors could buy shares, unlike IPOs where private persons are also included. Also, no banks underwrote the offering and no price was set ahead of the debut.
Moroever, direct listing is also the reason why the launching price was up to 26% compared to initial one communicated, which was 132 dollars on Monday night. Daniel Ek, who owns 9.2% of the skates and Martin Lorentzon, who has 12,25% are each worth $2.45 billion and $3.26 billion, which totals up to 5,7 billion.
Unlike other tech founders before him at the NYSE, Spotify’s CEO Ek Daniel did not attend the launching ceremony. He preferred to appear on screen on CBS’ live show This Morning. This was probably a good thing, as the NYSE made a mistake and raised the Swiss flag… instead of the Swedish flag.
A new market era?
While the share closed the day up to 13 percent, investment banks were eying deeply on probably one of the most anticipated market launch for the past years. “We could almost come to the conclusion that we might soon will not need any intermediate”, analyzed Kathleen Smith, co-founder of Bourse Renaissance Capital.
In order to gain credibility in the markets industry, Spotify hired Morgan Stanley, Goldman Saches and Allen & Co to build its strategy before the launch. However, professionals might need more proof. While they were looking closely the NYSE launch, most of them would rather wait before sharing opinions with the press. Spotify’s business model, far different from usual companies might be the cause of their hesitation.
Free accounts, Spotify Achilles’ heel
Just like Facebook, Spotify uses its users numbers to show its sustainability and its constant growth to investors. Spotify has a radically different business model compared to traditional companies, as it is using freemium. In other words, it’s a two-speed economical system, where the paying users and advertising are the only sources of revenue.
Spotify currently counts 159 million free users against 71 million paying accounts. While paying number accounts are going down, free accounts are going up and its advertising revenue only make ten percent of Spotify’s total earnings. An Achille’s heel that analysts have spotted and highlighted on Tuesday.
The free accounts have been drawing even more attention as Spotify is an online service, and not a marketplace, unlike Amazon that is selling hard products and has extra costs – such as more employees and warehouses.
In order to assert its sustainability to the investors, Spotify reminded the pros that Apple only counts 36 million users. However, the Swedish company forgot to say that Apple Music only started two years ago, compared to Spotify who, albeit having twice as many subscribers, started 12 years ago.