Spotify listing will test whether music giant can spin profits

Swedish music streaming giant Spotify is primed to go public ­tonight — a litmus test for the company’s lofty ambitions.

Spotify founder and chief executive Daniel Ek. Picture: Getty Images

Swedish music streaming giant Spotify is primed to go public ­tonight, in what will be a litmus test for the company’s lofty ambitions to do for music what YouTube did for online video.

Founded in 2008 by Swedish billionaire entrepreneur Daniel Ek, Spotify is a pioneer of the media streaming phenomenon but is yet to turn a profit. That is despite it having a total customer base of 159 million users and the fact that global revenues from music streaming, at $14 billon, ­surpassed digital and physical sales of songs and albums last year.

Fewer than 50 per cent of Spotify’s customers, about 71 million, are paying $US9.99 a month for a premium subscription. However, those without a premium ­subscription put up with ads in ­exchange for free music.

Convincing a user to move from the free product to the premium one is a costly endeavour for Spotify because the ads don’t cover the cost of the licensing fees and royalties that the company must pay to record labels. Spotify has so far paid up to $US10bn ($12.8bn) in music fees to extend its extensive library, losing over $1.5bn over the last two years in the process. It is likely to pay another $2bn over the next couple of years on licensing fees. While Netflix has been able to cut its reliance on the major Hollywood studios, Spotify doesn’t have the same luxury of ­severing ties with the four major ­labels — Sony, Warner Music, EMI and Universal Music — that own 87 per cent of the music on Spotify.

The biggest question for anyone looking to invest in Spotify is whether it can deliver a profit, even with a growing fan base.

Spotify has a lot of users but it has rivals with deep pockets. Apple, Amazon and Google have music streaming services, which have neither the extensive libraries nor the customer base. Nor do they offer a free option for users.

Apple Music, with 36 million users, is potentially its biggest threat. Apple may only have a fraction of the market share compared to Spotify but as long as the company can keep selling iPhones it can keep running Apple Music and absorb the licensing fees.