|13 September, 2018

Spotify value is out of tune with musical reality

The $33bln Swedish group is growing quickly

A smartphone is seen in front of a screen projection of Spotify logo, in this picture illustration taken April 1, 2018.

A smartphone is seen in front of a screen projection of Spotify logo, in this picture illustration taken April 1, 2018.

REUTERS/Dado Ruvic

LONDON  - Spotify gave downbeat music executives something to sing about. The popular streaming service showed labels how to make money by selling songs over the internet. Investors are betting that the music middlemen will now return the favour. That looks premature.

The $33 billion Swedish group is growing quickly. It has over 80 million paying subscribers – more than Apple Music. Revenue will rise 30 percent this year to $6.1 billion, using Thomson Reuters I/B/E/S estimates. Small wonder the stock has jumped 39 percent since listing in April.

Investors are brushing off Spotify’s heavy losses, which exceeded $1.4 billion last year, and its razor-thin margins. Payments to suppliers including music labels Universal, Sony and Warner gobble up three quarters of revenue, leaving a gross margin of 25 percent. Founder Daniel Ek hopes he can eventually pay lower royalties as Spotify’s size brings more bargaining power with middlemen.


Ek’s ambition is to grow revenue by as much as 35 percent a year, and to pay out just 65 percent of that to suppliers. That means $27 billion of revenue in 2023, and operating profit of $2.2 billion. On a multiple of 20 times, the average of Google, Facebook and Twitter, it would be worth $43.9 billion. Throw in $6.2 billion of free cash flow until 2023, discount everything at 8 percent, and Spotify should be worth $34 billion today. Since that’s close to its market value, investors seem to think Ek will hit his bold targets.

Will music labels play along They were happy to cut royalties last year, but then they owned a bigger slug of Spotify’s equity. Since April, Warner and Sony have sold shares.

True, Universal, Sony, Warner and independent network Merlin have an interest in keeping Spotify alive. They don’t want to be squeezed by the other music platforms like Apple and Amazon. But nor do they want a too-powerful Spotify. It’s already developing direct relationships with artists, potentially cutting middlemen out.

For now, the labels have a strong hand. Their musicians accounted for almost nine in 10 Spotify plays last year, reckons JPMorgan, while Spotify accounted for just one-fifth of their revenue, says Deutsche Bank. If Spotify gets too uppity, they have the nuclear option of withdrawing music. That’d leave Ek’s shareholders singing the blues.

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- Shares in Spotify Technology closed at $183.71 on Sept. 12, or 39 percent above the reference price set by the New York Stock exchange before its April direct listing.

- The Swedish music-streaming service will be out of contract with all three major record labels in just over a year time, according to an Aug. 14 report by industry website Music Business Worldwide.

- Variety magazine reported on Aug. 7 that Warner Music Group had sold its entire stake in Spotify. Sony, which owned 5.7 percent of Spotify in April, has sold shares, taking it below the 5 percent threshold for disclosing its holdings.

- Vivendi, owner of Universal Music Group, said in April that it sees Spotify as a strategic partner and intends to keep its stake.

- For previous columns by the author, Reuters customers can click on PROUD/


(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

(Editing by Neil Unmack and Karen Kwok) ((; Reuters Messaging: