General presentation of Spotify:
The Spotify group is a Swedish company specializing in music streaming which operates software and a website. It offers an instant music listening service with a varied and very important catalogue of artists and albums and certain specific functionalities such as the possibility to listen to music offline or create playlists. Spotify also allows users to buy songs or albums directly through a partner merchant website.
The Spotify group has set up a business model which mainly uses advertising revenue. In its free version, advertising spots are broadcast at regular intervals while the user listens to music. Spotify also offers a paid version of its software, without advertising this time and with unlimited listening even offline for € 9.99 per month. It also offers preferential rates for families or for students who can take advantage of the service at a lower cost. Spotify also bases its marketing strategy on various promotional offers throughout the year which allow it to attract new users by letting them discover the software for a small fee during the first months.
The Spotify group counts on contracts signed with major music labels in order to offer its users countless tracks
Knowing Spotify shares competition:
Spotify is currently the world leader in its sector music streaming. It's also the pioneer in this field, which gives it a certain advantage. But there are also many competitors in this booming industry and it's obviously important to know the main enemies of Spotify and their assets before you start trading this share. Here is the list of Spotify's main competitors:
- The French group Deezer: is of course one of the huge competitors of Spotify. It offers a very varied catalogue of tracks due to quality partnerships and subscription formulas at prices equivalent to those of Spotify. The features of these two giants of music streaming is also very similar.
- Amazon Music: Amazon's music streaming service is also a serious competitor which has started to develop its on demand music offer after its video on demand in Europe. This service has already been available for several years in the United States.
- Google Play Music: the third most important competitor of Spotify. Although the number of users of this service is well below the performance of the competitors mentioned above, the platform could gain in functionality and therefore popularity in the years to come.
- Apple Music: the music service on demand from the American giant Apple has everything to seduce users. It's considered as the world number two in this sector of activity nowadays just after Spotify and therefore represents a real threat.
- Soundcloud: formerly for artists wishing to share their music, Soundcloud is currently developing its paid offer with Go Soundcloud, a more traditional streaming platform which could develop extensively in the near future.
The strategic alliances set up by the Spotify group:
- Tinder: In 2016, Spotify set up a unique marketing partnership with the Tinder dating site and application. Thanks to this partnership, Tinder users can now publish a musical title on their dating profile and also listen to and share their favourite songs directly through Tinder and even see the profiles of singles with the same musical tastes.
- Netflix: In 2017, the American video streaming giant Netflix also partnered with Spotify to create an interactive playlist offering users to know what they have in common with the characters in the Stranger Things series. A link set up by Spotify allows users to get the result of this test according to the tracks most frequently listened to on its software.
- Buzzfeed: In 2018 and just before its IPO, Spotify decided to diversify its streaming offer by offering information content thanks to a partnership set up with different publishers. The first service of its kind called Spotlight is a podcast of daily sports and cultural news resulting from a partnership with BuzzFeed. This service, initially available in the USA, could arrive in Europe soon.
- Atol: Finally, also at the beginning of 2018, Spotify tried to seduce customers in their 40s by setting up a strategic partnership with Atol opticians. When a track from the 70s or 80s is listened to on a Spotify playlist, an add pops up inviting users to go to one of the opticians on the network to have their eyesight tested.
Introduction and stock quote of the Spotify share:
We had been waiting for it for a long time and finally on April 3rd the Spotify group went public. The IPO of the share also made a lot of noise since it ended its first session with an increase of 12.9% on the NYSE market.
Stock price analysis
While the reference price of the Spotify share had been set at 132 dollars on Monday evening by the NYSE, it opened with a rise of 26% and finished at more than 149.01 dollars, which allowed the group to value itself up to 26.5 billion dollars, 21.6 billion euros. As with any direct IPOs, the reference price of the Spotify share had previously been determined from the overall valuation of the company, over 23 billion dollars, 18.75 billion euros. Last February, this same valuation was estimated at $ 20 billion at the time of various off-market transactions by existing shareholders.
The IPO of Spotify was carried out through a direct listing procedure which is the exact opposite of what is observed during IPOs or public sales offers. With this direct listing, the group cannot raise fresh capital and saves money on the commissions generally charged by banks for IPOs. This characteristic leads existing shareholders to have to wait for the actual listing in the stock market before selling their shares and investors interested in an entry into the capital to await the actual listing of the share and suggests probable volatility, at least in the short term with various operations pending.
Although the Spotify group is not really profitable at the moment since no profit has been made in the past ten years that it exists, it's the potential of the company with its 71 million users which attracted investors on the stock market. Spotify is number one worldwide in this sector on an international level.
The NYSE collected the buy and sell orders before the opening on Tuesday, April 3rd, 2018 and used them to determine the opening price of this security. Since the Spotify group didn't want to hire a supervisor for the placement of its shares, it was the Citadel Securities Company which was commissioned to determine this opening price on the NYSE in collaboration with Morgan Stanley.
It's important to know the Spotify group's economic and financial history in order to have a better understanding. Here is a summary of important events and key dates in its history.
- 2009: Spotify inaugurated one of its first European centres in Paris. It soon had over 7 million users in Europe in 2010 with more than 250,000 paying subscribers.
- 2011: The Spotify group profited from an investment of over $ 100 million from Digital Sky Technologies, an American investment fund. Its value maximisation exceeded one billion dollars. The same year, the group reached one million subscribers. The same year again, the SFR group offered a Spotify service in one of its subscriptions. Also in 2011, Spotify signed agreements with EMI, Sony Music, Major UMG and Warner.
- 2012: Spotify removed the 5 play-per track limit in Europe but not yet in France. France had to wait until 2013 for this limit to be lifted. The same year, SFR ended its partnership with Spotify.
- 2013: The service became accessible from a web browser with Spotify Web Player.
- 2014: The group acquired the American intelligent music platform The Echo Nest. The same year, it launched a partnership with Uber in the VTC sector which consisted in offering passengers music tracks to listen to during the journey. That year, Spotify reached 50 million users with 12.5 million paying subscribers. The group's results were still negative with a loss of more than 162 million euros, particularly due to the royalties paid to the labels of distribution companies.
- 2015: The number of Spotify users rose to over 75 million with 20 million paying subscribers. Repayments reached $ 3 billion. The same year, in France, the group profited from a partnership with Bouygues which helped it increase the number of subscribers by 150%. However, it still wasn't making the slightest profit despite a value maximisation of more than eight billion dollars. That's why, also in 2015, Spotify decided to compete with the YouTube platform by starting up video streaming.
- 2016: The number of users reached 100 million but only a third of paying subscribers and ever greater losses which place the group in a situation of significant fragility.
- 2017: The group had 50 million paying subscribers worldwide. The same year, it signed a licencing partnership with Universal Music Group. In June, there were 140 million users. However, the losses remained significant despite an increasing turnover. The same year, Spotify and Tencent Holdings perform a cross-holding and set up a partnership aimed at developing their distribution from a geographic point of view.
The advantages and strengths of the Spotify share as a stock market asset:
Firstly, the Spotify group enjoys an interesting position in the streaming music market as it is both the pioneer of the industry and the world leader in terms of number of users. This gives Spotify a certain amount of consumer confidence.
Spotify also appeals to both paying and non-paying users because it is easy to use compared to some of its competitors. In addition to the Sartphone application and software for PCs, tablets and other devices, Spotify is web-based and has a user-friendly interface that is both fun and easy to use. Being able to listen to music free of charge and without any subscription is also a real plus for the company, which is then paid for out of the advertising space sold.
Spotify has also understood that using social networks to get known is a good strategy. Spotify's playlists give the platform a social aspect that allows it to both retain existing users and gain new ones.
Spotify isn't going to stop at the services it currently offers and, following the recent launch of a streaming news service, is looking into the possibility of streaming live content and is also expanding its video-on-demand service.
Finally, as far as Spotify's strengths are concerned, it should also be noted that its seniority and experience in this field make it a trusted intermediary for artists and production houses. The group is thus able to negotiate prices with these artists and gain the confidence of advertisers with regard to its advertising space service.
Disadvantages and weaknesses of the Spotify share as a stock market asset :
Firstly, Spotify is notorious for paying artists at low prices because its basic service is free, which could be a problem in the long run if its competitors offer higher remuneration.
Secondly, although Spotify's library is very comprehensive, it remains limited due to artists splitting up their catalogues.
It should also be noted that Spotify's business model of pushing users to take out a subscription by reducing access to the free service may lead to a slowdown in the growth of users in the coming years.
Of course, fierce competition from the industry and especially from its growing competitors such as Apple, Amazon and Google could weigh on Spotify's reputation and cause it to lose its number one position in the industry, especially as these companies also enjoy strong popularity in the eyes of the public.
The rise in illegal downloads, despite the procedures put in place to curb this phenomenon, is also a major handicap for companies in this sector who could see their subscriptions decline over time.
Finally, it should be noted that Spotify is not yet making a profit. Reducing its losses and generating new profits is therefore one of the major challenges for the coming years.
To sum up, it's interesting to compare the strengths and weaknesses of the Spotify group in order to determine the chances of growth for the group and therefore for its stock on the stock market.