Estimated Valuation: More than $20 billion
Product: Music Streaming
Year Founded: 2006
Spotify has reshaped the global music industry by replacing traditional technologies such as CDs and downloads with a streaming music service that posted $4.99 billion in revenues in 2017 and is currently valued at over $20 billion.
Upending the Industry
In a little over a decade, the Stockholm-based startup has grown into one of the industry's premier companies, offering more than 35 million songs to 71 million paying subscribers in 65 markets, according to the company's website. Since Spotify was founded, the service has helped generate $9.8 billion in royalties for companies that own rights to the music, called rightsholders, who then pay musicians based on individual contracts.
Piracy was a major issue when Spotify was founded, so the company negotiated with music labels to stream their artists on Spotify, and it pays the labels each time a hit song is listened to. Spotify's success forced tech giants such as Apple Inc. (AAPL), Alphabet Inc. (GOOG) and Amazon.com Inc. (AMZN) to rethink how they sell music to consumers.
In 2005, co-founders Daniel Ek, now CEO, and Martin Lorentzon came up with the idea for the service while sharing music with each other in an apartment in Sweden. Ek, now 33, and Lorentzon, now 47, formally created the company in 2006 and released the first public beta of their music streaming software in 2007.
After launching its first app for the Mac, according to TechCrunch, Spotify spread quickly to Android, Windows, iOS, Mac and Linux . The company has grown to employ more than 2,960 people as of 2017.
Both co-founders have extensive experience with startups. A dropout from Stockholm's prestigious Royal Institute of Technology, Ek founded online classifieds company Advertigo and sold it to TradeDoubler, a digital marketing website, according to Inc. Lorentzon, who co-founded TradeDoubler, struck up a friendship with Ek as a result of the sale.
Since its founding, the streaming service has had no problem attracting venture capital. It raised $2.7 billion in 22 funding rounds, including multiple debt financings, according to Crunchbase.
Some of Spotify's larger funding rounds include a $100 million Series D in 2011, led by Accel Partners, a $100 million Series E led by Goldman Sachs Group Inc. in 2012, a $250 million Series F led by TCV in 2013 and a $526 million Series G round in 2015 with 15 different investors, according to Crunchbase.
Founders Fund, one financial backer, has invested in companies such as Lyft, Stripe and Palantir Technologies Inc., according to Crunchbase. TCV has backed companies such as Netflix Inc., Airbnb and Rent the Runway, Crunchbase says, and Accel Partners has invested in companies such as Slack, Fiverr and Jet. (See also: Top 6 Spotify Shareholders)
No Profits and Rising Competition
Spotify's biggest competitor, Apple Music, has close to half the number of subscribers it does. However, despite its huge audience, Spotify has been fragile financially, and it is yet to turn a profit. It posted a loss of $1.5 billion last year and $657 million in 2016.
Unlike Apple Music, YouTube and Amazon Music, Spotify has no other businesses to rely on for revenue such as the iPhone, search, e-commerce or cloud computing. More importantly, it doesn't build hardware devices for its service to be preloaded on.
Spotify's challenge is also severe price competition in music streaming. The company gets revenue from active users and also sells advertising that brings in revenue on streaming music to users who listen for free. But it has major costs from licensing content and paying royalties. Since it relies on a highly concentrated industry for content, its access and revenue can be easily hurt as well. Music licensed to the firm from Universal Music Group, Sony Music Entertainment, Warner Music Group and Merlin accounts for approximately 87% of streams. Additionally, it is vulnerable to expensive lawsuits from rightholders claiming they haven't been paid enough.
It's unclear whether Spotify's glittering resume of A-List stars will lead to success either as an IPO or as a public company longterm, given its string of financial losses. Some analysts say the music industry's quest for consumers' digital dollars may, instead, force Spotify into a partnership - or into the arms of an acquirer.
Ahead of its IPO, the company received bullish calls from analysts at MKM Partners and RBC Capital.