Spotify’s IPO and The Future of the Music Industry

It is finally happening! Spotify just publicly filed to list at a $19.7bn valuation on the NYSE (ticker:“SPOT”), based on the midpoint share value.

It was the first company to file for a direct listing (i.e not raising any new capital and avoiding the using brokers to list) of up to $1bn with the US Securities and exchange commission.

So what was in the filing? And what does it mean for the future of the industry?

The filing states that Spotify is the world’s biggest streaming service and is twice as big as their nearest competitor, Apple. Their 2017 revenue of $3.99bn is more than double their 2015 revenue, driven largely by the increase in premium subscribers which now account for 71 million (90% of revenue from paid subscription vs.10% for advertising).

Despite this, they are experiencing widening losses, at a whopping $1bn last year due to royalties ($8bn in 2017) and distribution fees i.e. they are paying the majority or revenues back to record labels for their songs. This issue underscores that the economics aren’t working, even for the largest streaming businesses.

For the past year, Spotify spent much of its effort to renegotiate better deals with the record labels. They struck a deal to pay a lower royalty rate with Universal music group in April, its biggest supplier and the world’s largest record label. They also committed to pay a guaranteed €2bn to record labels over the next two years, in exchange for lower royalty rates.

So where does that leave us? Is this really the recovery of the music industry?

People are clearly listening to a lot of music, at 40.3bn hours in 2017 or 25 hours per active user, and this is growing year on year. This trend is mainly driven by Millennials (age 18–34) who make up 62% of the market share, based on Spotify’s users. It is also reported that the majority listen up to 6 hours of music per day which is higher than all previous generations.

Playlists are still the main way users discover new music. Spotify states that personalisation through playlists (both editorially-curated and Machine-generated) is what is driving the user engagement and growth. For now, playlists are accounting for 31% of all listening on Spotify, which means that there is still potential for personalisation to drive user engagement more.

It is clear that we live in a world where ALL possible music is available anytime and anywhere. That means that music is becoming more and more woven into the fabric of our daily lives, especially for the digital native users. The challenge for Spotify, and all music providers, now is how can they match our moods and tastes to their huge catalogs of sounds.

The future of the industry

As listed in the Spotify filing, the main risks to the streaming business are related to user engagement and models for compensating artists. These two challenges create an opportunity for new companies to innovate and drive the industry forward.

The approaches that are taken until now for improving user engagement revolve around:

1. music personalisation for specific use cases (specific moods, focus, sports)
2. new mediums and augmented experiences (mainly smart speakers, smart headphones, and virtual reality) and;
3. data-driven solutions for music business and producers to further optimise all the distribution channels.

On the music creation side, there are three main approaches :

1. technologies like blockchain are being used to create new distributed solutions for better copyright handling and better compensation for artists
2. more traditional solutions exist in the form of the emergence of a new breed of “digital” labels that are more aligned with artists and that leverage the latest technologies (AI, data, mobile…)
3. a more radical approach can be found in all the efforts that are being made to create Musical AIs. This is the most interesting for all the content creators that need an easy and cheap way to use music without dealing with all the copyright issues

We have highlighted all the key players that you need to keep an eye out for 2018 in the infographic created below with my co-founder, Yassine Landa:

As technology is driving this new wave of business, we have seen an interesting trend around the revival of the link between science and music. Branches of machine learning like Music Recommendation Engines, Computational Music, and Music Information retrieval are flourishing which revived the interest of Music in scientist communities in Neuroscience, Psychology and Behavioural Science.

This is the huge opportunity that we saw when we joined Zinc — an accelerator program in the heart of London that focuses on solving the world’s toughest social issues. To solve this year’s mission, which is helping billions of people with their mental health problems, we created Zone.

Zone, is the first music platform that focuses on fast-tracking people to their desired state of mind, using music, AI, and science.

We are currently building the first version of our product with innovative artists and scientists to create a radically unique solution. To learn more or sign up for our beta trial, go to http://zonenow.io