The Industry

What Spotify’s Lack of Profits May Mean for its IPO

The opening numbers are displayed on the floor during the Spotify IPO at the Dow Industrial Average at the New York Stock Exchange on April 3, 2018 in New York.
The opening numbers are displayed on the floor during the Spotify IPO at the Dow Industrial Average at the New York Stock Exchange on Tuesday in New York.
Bryan R. Smith/AFP/Getty Images

The music-streaming company Spotify began allowing its investors to sell shares on the New York Stock Exchange on Tuesday in an unusual initial public offering (IPO) that eschewed the customary underwriting and “roadshow” presentations. Trading under the ticker SPOT, the shares debuted with a price of $165.90, which puts the company at a $23.5 billion valuation.

Spotify joins a growing group of tech companies that have the dubious distinction of being unprofitable at the time of their IPOs. According to filings it submitted in February, Spotify had a net loss of $1.5 billion in 2017, even with its almost $5 billion in revenue and 160 million active users. One of the major barriers to Spotify’s profitability is the licensing dues it has to pay to music publishers, which eats up a majority of the revenue that it gets primarily from advertising and subscription fees. The company pays for licensing every time a user streams a song, which contributes to the incredibly thin margins. (Streaming services for other media, like movies, typically only have to pay a one-time fee for a piece of content.) As Recode points out, Spotify’s content costs thus rise with its user growth, making it difficult to turn a profit unless it finds another sustainable revenue source or figures out how to pay less to publishers. Spotify itself doesn’t seem to have made any firm public predictions as to when it will become profitable, though its pitch to investors, according to Recode, has been that it will gain more leverage with music labels to cut fees once it gets big enough.

Lacking a clear path to profitability has been a common stumbling block for other tech companies after their IPOs. Perhaps the most immediate cautionary case is Snapchat. Even though the social media company had a blockbuster first day on the market last year with a 44 percent rise in prices, its shares have since then been trading below their IPO price. The company reported $3.4 billion in net losses last year and has been laying off hundreds of employees. As the Los Angeles Times reports, many investors were skeptical that Snapchat would eventually make a profit even in the months directly following its IPO when it launched a series of new map tools, video content features, and initiatives to make it easier to buy advertisements on the platform. Yet, without this proven capacity for profitability, investors saw Snapchat as a risky bet. CEO Evan Spiegel reportedly told employees that his goal is to make a profit in 2018, though most analysts believe this won’t be possible until at least 2021.

Twitter also struggled with profitability following its IPO in 2013, though it had a similarly successful first day on the market with a 73 percent gain. The hype fizzled out soon after as the platform struggled to find ways to grow its user base, and Twitter’s shares spent long stretches of time trading below its IPO price with investors skeptical that it could ever turn a profit. At one point in 2016, shares traded 36 percent below its IPO. Twitter finally became profitable for at the end of 2017.

This is all to say that Spotify likely has a bumpy road ahead in pleasing shareholders until it can find a way to substantially grow its revenue or radically cut down on costs.