The thrills and risks of the Spotify IPO in New York

dubai - The Wall Street grapevine is that Spotify will be valued at $20 billion in the stock market

Not since the Beatles and the Rolling Stones swept America in the Swinging Sixties, has a Britain reinvented the world music scene as will happen when the Spotify IPO trades on the New York Stock Exchange. The Wall Street grapevine is that Spotify will be valued at $20 billion in the stock market. My teenage twins introduced me to the virtues of a Spotify music streaming subscription and a brilliant investor friend of mine in Bur Dubai textile market earned four times his money as the streaming music service hit 100 million subscribers worldwide. Welcome to the exponential mathematics growth curves of the Digital Age.

The Spotify IPO will not be a traditional book building effort led by an investment banking syndicate. It will be a direct listing on the NYSE. In essence, Spotify shareholders will sell shares directly to the public, not raise new capital from Wall Street's institutional investors. Spotify is a global brand already so it does not need to IPO its shares on the Big Board as a branding exercise. This listing is just designed to provide liquidity to existing shareholders. This means that Spotify shares will be hyper-volatile after the IPO, with no underwriting syndicate to stabilise the aftermarket.

The Spotify IPO will have no roadshow, no 5 per cent underwriting fees, no self-serving "cornerstone investors", no conflict of interest riddled syndicate pots, insider sweetheart deals, no company mandated lock up periods. Since the Spotify IPO will be sold to retail investors in March, expect Bitcoin like "irrational exuberance" since the brand is now a global household name. Of course, the shares could also tank 50 per cent or more if sentiment on the business sours.

After all, Spotify's competitors include global corporate colossi like Amazon/Apple as well as potentially the next Silicon Valley music startup. Spotify also faces legal risks from musicians displeased with its revenue sharing deals, as the current lawsuits by the agents of Tom Petty and The Doors (riders in the storm!) attests. Tidal, founded by Jay-Z, is also a potential rival since it is owned by musicians who will release their streamed content exclusively on its platform. My take? I would rather own musical copyright rights and earn royalties than pay royalties for content and sell subscriptions. Hence my fondness for Sony and Vivendi. Music streaming will exhibit cutthroat economics even if Spotify has won the Gorilla Game in this niche.

The private market values the Spotify "unicorn" at $16 billion. As Uber's recent Softbank led financing round proved, it is entirely possible for a unicorn's value to be slashed from prior peaks in the private market. Yet I doubt if this will happen to Spotify unless the entire tech share market tanks before March. Could the Spotify IPO turn into a debacle like the Facebook IPO in 2012? I doubt it but the risk exists if a deluge of early stage investors, founders and company employees sell shares. I would have preferred a stock market value nearer $12 billion or four times 2016 sales from 150 million odd active users. Yet there is no doubt that Spotify is the Big Enchilada, Numero Uno in music streaming and a 40 per cent discount to a $20 billion post flotation value will only emerge when the Valley grizzlies finally emerge from hibernation, as they surely will.

Spotify has managed a twelve fold rise in its paying user base and is the dominant global brand in streaming music. It has the potential to continue 50 per cent revenue hypergrowth and even turn profitable in the next two years, though it lost $600 million in 2016. Yet while the potential of music streaming is global, so are the ambitions of its archrivals Amazon Music and Apple Music. Spotify's business model is also hostage to both artiste avarice and licensing negotiations with the world's preeminent music labels. I do not expect the Spotify IPO to be a sad sack loser like Snap or even Twitter but the possibility of a 30-40 per cent post floatation hit can never be ruled out. After all, hyper-growth startups must also demonstrate viable profitability and margins (unless they are Jeff Bezos). Spotify can be hit by high royalty costs, a price war with Amazon/Apple Music and content wars with Jay-Z or even other startup rivals like the French Deezer. Caveat emptor.


The writer is is a global equities strategist and fund manager. He can be contacted at: mateinkhalid09@gmail.com