Spotify disrupted the music world, now it’s disrupting Wall Street

When the streaming service goes public, banks will collect a fraction of the fees underwriters make in a big IPO.

Daniel Ek, CEO of Swedish music streaming service Spotify.

Spotify upended the world of music with its popular streaming service. Now it is threatening to do the same to Wall Street.

Banks working on Spotify’s unusual public share listing stand to collect a fraction of the fees underwriters typically charge in big IPOs, in a blow to the already beleaguered stock-selling business.

Spotify’s three advisers — Goldman Sachs, Morgan Stanley and Allen & Co — are poised to share roughly $US30 million ($37.7m) in fees, though that could change depending on the size of the company when it debuts and the success of the deal.

That is a sharp drop from the fees generated by Snap, the last big technology company to go public in the US. When the messaging provider went public last year its valuation was about the same as Spotify’s, but it paid banks a total of nearly $US100m. That was roughly 2.5 per cent of what Snap raised, a fairly typical fee for a marquee IPO, which is smaller than the overall average of as much as 7 per cent.

Spotify’s bargain-basement listing comes at the worst possible time for an underwriting business that has been hit by a steep drop in IPO volume as more tech companies seek private financing instead. Last year and 2016 were two of the worst on record for US equity capital markets revenue when adjusted for inflation, according to Dealogic. In 2017, ECM in the US generated just $US7.3 billion, roughly 43 per cent of the inflation-adjusted high in 2000.

ECM fees from US companies have traditionally accounted for about one-quarter of overall US investment banking revenue. In 2016 and 2017, they made up just 13 per cent and 15 per cent, respectively.

Bankers’ fees on the top US-listed tech/internet IPO

Spotify’s debut is expected to be the largest for a tech company this year. The way in which the Swedish company’s owners have decided to move into the public domain is anything but typical.

The cash-rich company won’t be using underwriters or raising cash in the so-called direct listing. Instead, it will simply float its shares at a price the market determines. The listing is expected to take place in late March or early April, though the timing could change.

There is a big concern among bankers that if this method of going public proves viable, other valuable tech start-ups Wall Street has been salivating over — like Airbnb and even Uber — could use it as a model.

“If a company can raise the majority of its growth equity capital privately and float their shares in a broker-free offering, it would be scary for the underwriting business,” said Michael Sobel, co-founder of Scenic Advisement, an investment bank serving private tech companies.

“The IPO is a cornerstone of the banking business.”

The Spotify banks won’t perform traditional underwriting functions, which include setting a price for shares, linking buyers and sellers and agreeing to use cash to stabilise the stock at a certain level.

While Spotify and its advisers are still determining how exactly the process will work, the banks are expected to have a role in helping guide the market to a price and connecting buyers and sellers initially, but not necessarily a central one.

Secondary trading in Spotify shares is intense on private markets. They were recently trading at a price valuing the company at roughly $US15bn; it then struck a share swap with Chinese internet giant Tencent that valued Spotify at nearly $US20bn.