CNET también está disponible en español.

Ir a español

Don't show this again

Music

Spotify IPO shows how its streaming losses saved the music world

The recording industry is making money because Spotify built itself into a giant that doesn't turn a profit.

Joan Solsman/CNET

Spotify is unofficially all grown up. But it still has a long way to go before it comes into its own.

On Tuesday, Spotify became a publicly traded company, every tech startup's milestone of adulthood. A little before noon ET, the music streaming service began trading on the New York Stock Exchange under the symbol SPOT. The shares opened at $165.90 each, well above a "reference price" of $132 the NYSE set Monday night. Although shares slid throughout the day to eventually close at $149.01, the debut values Spotify at $26.5 billion. 

The Swedish company has taken an unusual tack in going public. Unlike with most multibillion-dollar IPOs, the founder didn't ring the opening bell. That's because Spotify, which charges $10 a month for commercial-free music, isn't selling a heap of new shares to rake in money. Instead, its shares will simply trade for whatever the investors think they're worth.  

"Spotify has never been a normal kind of company,"

Daniel Ek, the company's co-founder and chief executive, said in a blog post Monday.

Spotify Investor Day

Spotify founder and CEO Daniel Ek detailed the streaming music service's business at an investor day in March. 

Getty Images

He's right. Spotify has grown into the world's biggest streaming music service, driving a larger, cultural shift in how we play and pay for music. After decades of buying music outright, as we did in the era of CDs and digital downloads, we're increasingly paying flat fees for all-you-can-access tunes. With Spotify leading the charge, that shift has revived the music industry after 15 years of atrophy.

Spotify's turnaround of the music industry's fortunes, however, comes at the expense of ballooning losses. As the company goes public, can it save itself?

Record industry's gain, Spotify's loss

Spotify, which declined to comment for this story, has seen widening losses throughout its growth. Last year, its loss grew to 1.235 billion euros ($1.507 billion), its largest ever.

Music licensing -- the payments Spotify makes to artists, songwriters and labels every time a song is played -- is the company's biggest cost. It eats up more than 70 cents of every dollar of sales. That giant bite from music royalties isn't just a Spotify problem, it's something that dogs all streaming music services and it's why most operate at a loss.

The flipside of those losses is the music industry's renaissance. The music industry had a banner 2017, with revenue jumping 16.5 percent to $8.7 billion, according to the Recording Industry Association of America (RIAA). The growth was the industry's best in nearly two decades. (Last year's international sales are set to come out later this month.)

Money from subscriptions was the biggest driver of the music industry's growth. Downloads, the type of music that defined digital sales since 2003's launch of Apple's iTunes store, now make up less than all types of physical music sales combined. Put another way, iTunes today is a smaller business than CDs and vinyl records.

Spotify instrumental

Spotify competes for paying subscribers with Apple Music, Pandora, Google Play Music, Amazon Music Unlimited, Tidal, Deezer, iHeart and others. But Spotify is the one that matters to the music industry's turnaround because it was the first -- and the biggest -- to make subscriptions a hit with consumers.

"Spotify was not the first streaming service but it is the most important," Mark Mulligan, managing director of music and tech researcher Midia Research, said via email. "Without Spotify, the music business would not be growing."

With 71 million paying members, Spotify is the biggest streaming music service in the world. Apple Music, its closest rival, has 38 million subscribers. And Apple Music only launched in 2015 after Spotify had proven people would pay a monthly fee for tunes.

add-family-to-spotify-premium.jpg

Spotify is the world's biggest music streaming service, with 71 million paying customers. 

Taylor Martin/CNET

The company's pioneering approach lifted the music industry out of a decline that stretched back to start of the millennium. But that's a really expensive undertaking, said Jordan Bromley, a lawyer focused on music at Manatt, Phelps & Phillips.

"If you've got to pull something out of the gutter, it's going to cost a lot," Bromley said.

The recording industry didn't want to see tech companies grow rich at its expense, said Mulligan. Labels and other rights holders felt burned after watching companies like YouTube sell to Google or Pandora go public in an IPO that raised $235 million.

So as rights holders engineered their deals for streaming subscriptions, the terms ensured labels made money regardless of whether a service was profitable, Mulligan said. Some argue that this is as wrong as the old situation, he said, "if now the only way to build a sustainable music business is to be unsustainable for many years."

The Amazon example

Spotify has two possible paths to profitability. One is to expand into other entertainment businesses free of burdens such as music royalties.

Russ Crupnick, analyst and managing partner at MusicWatch, said someday we'll look back at the Spotify of today and laugh at the idea it was solely a music platform. He ticked off a list of areas Spotify could take on, including podcasts, concerts, live events, audio books and video. All of these could offer better profit-building power than recorded music.

"We thought of Amazon as being a bookstore, and look what happened," Crupnick said. "Spotify could be the same thing."

Spotify has already experimented with video, and it said in financial documents that it wants to expand further into spoken-word audio, podcasts and video to broaden its business.

But expanding wouldn't be the only thing Spotify and Amazon have in common. The online retailer didn't post a profitable quarter for almost four years as a public company. And even after it started consistently reporting profits, Amazon's quarterly income only recently cracked the $1 billion mark, even as its sales have catapulted beyond $60 billion.

The other path for Spotify to become profitable: sheer scale.

By growing powerful enough, Spotify may be able to bend the recording industry to its will -- and save itself.

First published April 3, 5 a.m. PT.
Update, 10 a.m. PT
: Adds opening share price and valuation. 
Update, 3 p.m. PT: Adds closing share price and valuation. 

The Smartest Stuff: Innovators are thinking up new ways to make you, and the things around you, smarter.

Tech Culture: From film and television to social media and games, here's your place for the lighter side of tech.