• Spotify is going public in March
  • It's using a direct listing, which nobody thought was possible, and may change the way the industry does things
  • The Spotify business model, as it stands, does not work: it's losing billions each year
  • Spotify has substantial risk, most relating to Apple + Google owning the app platforms they rely on (and taking fees!)
  • Spotify's scale is staggering, with 71 million subscribers paying today

Spotify filed its S1 to go public this year today, and it's our first look inside a company that we don't really know much about. Unlike most startups, Spotify has an industry that loves money to go up against: the music world.

The IPO is an interesting one, because Spotify is entering the market through a direct listing. No banks are involved, which is a notable departure from traditional listing which involve finding a bank to underwrite the shares and distribute them.

Instead, Spotify is going direct to the market — and the public — which marks the first time a major technology company has done so. If it works, it might change the way companies go public, but it won't work for just anyone given an important part of doing this is how well-known the service is.

Of note: Spotify won't generate any cash for itself directly with this listing. Existing shareholders are making their shares available on the market, not the company itself — there's a good explainer here.

Spotify's IPO is astounding in different ways, too: it lost more than $7.9 million every day in the last quarter of 2017 despite having 71 million subscribers, and lost a total of $1.5 billion over just 2017 alone. The business model, it seems, does not really exist in the current price structure.

Here's an example of this: Spotify has an ad-supported plan and the paid plan. 90 percent of revenue comes from the paid plan, but the cost of acquisition of those users is almost 80 percent of the revenue they'll get! 😱

Average revenue per user also reflects this. Spotify's ARPU fell consistently, year on year, since 2015 from €7.06 in 2015 all the way to €5.24 in 2017 — this can be pinned on increasing costs, but also foreign exchange rates.

On the other side of things, people love the service: 40.3 billion hours were streamed in 2017, and it's almost doubled since 2016, when 26.7 billion were streamed. 159 million people use the service across the world, and more than half of them are paid users, which is an impressive feat.

Spotify's churn rates have also decreased dramatically, to just 5.5% last year, an impressive feat for a music service that's fairly easy to switch away from due to the sheer amount of competition out there. 

The elephant in the room is how will Spotify actually get to profitability? In its own risks section it warns that both Apple and Google have a significant competitive advantage: they own the app stores, and get a cut of Spotify's fees — as well as running their own music services. 

The path to that revenue, according to the IPO document, is surprise: original content. Spotify sees securing exclusives as one of the only ways forward, but also securing its own infrastructure, further research and development and other efforts. 

Most concerning of all is that Spotify's costs can fluctuate wildly due to licensing agreements. If it doesn't hit targets based on user or conversions, costs may go up substantially, or it may lose a library of music. 

The IPO listing is, well, savage to say the least. The music industry is hard, and has significant costs to it, along with the risks that come with incumbents (Apple and Google) being able to hold pricing over Spotify's head in the future. 

Still, I suspect the listing will do well, and the company to continue growing for two reasons:

• The network effect. Spotify's platform is the most social out of all the options, and users share playlists actively with one another.
• Spotify is actually really good at marketing. It specifically touts its campaigns as having huge success in the market despite relatively decent costs — something that is not simple to do.

With this all in mind, what's Spotify's share price on day one? Somewhere between zero and a zillion dollars. This IPO is going to get weird. 

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