Spotify just bounded over it’s last major roadblock to going public with its new licensing agreement with Warner Music, and now it’s final hurdle is convincing the SEC that its direct listing is on the up and up. This means that the company looks to meet its goal of being listed on the New York Stock Exchange by the end of the year, but many questions about the process still remain.
The streaming music company is said to have chosen a rather unique direct listing rather than the traditional IPO, and while the obvious reason might be to avoid the high underwriting charges, it’s possible there’s much more to it than that. For instance:
• There’s no “lock-up” period to prevent early-stage investors and employees from selling shares in the months following a listing. That would make it much easier for many of the investors to cash out much sooner than they might have otherwise.
• IPO’s tend to make money for the institutional investors should the stock go up past the offering price. The company doesn’t see any of that, and Spotify sees the risk of a price jump without the wholesale investors on board versus a guaranteed price set by the underwriters as worth while.
• The company may be worried about how the stock might be received both by institutional investors and the public, since despite more than $3 billion in revenue the company continues to bleed more and more money. A direct listing means that any worry by institutional investors may be mitigated by the majority of sales made to less sophisticated retail investors.
It’s a complicated equation in that both Spotify’s investors and the company need to navigate, but not one without its minefields. Of course none of this would be an issue if the company was turning a profit, or even close to it, but currently the loses are going in the wrong direction and growing.
What to do? Perhaps the best thing would be for Spotify to pull an Apple and get into the hardware business with a line of branded smart speakers. The market for that product genre is just beginning and hardware can provide a far higher margin than music streaming. Yes, I know it’s easier said than done to get into hardware, and the tech industry is littered with big and small companies that have tried and failed (hello, Google). On the other hand, Beats managed to do it as a design and marketing company that turned out pretty well with far fewer resources than Spotify has. Just by mentioning the fact that a high-margin product was on the drawing board would spark major market interest, and could dramatically change the stock price.
Of course, one of the major problems that Spotify has (and this may eventually be its undoing), is the fact that it has one and only one product with music streaming. It lives and dies on that product. It’s competition (Apple Music, Google Play, Amazon Prime Music) has far deeper pockets, with music streaming being only a tiny portion of their businesses. Those companies can even offer music streaming as a loss leader with hardly any negative occurring to the bottom line.
That’s a lot for any company, even a market leader, to deal with, and it’s something that the market is quietly keeping an eye on. That said, Spotify has done all the right things to be listed by its target date, and there’s no reason to believe that it won’t happen. Now if only there was another product.