Billion Dollar Unicorns: Spotify Gearing Up To Face Apple Music

According to a recent report published by the IFPI, global music industry revenues fell 0.4% over the year to $14.97 billion in 2014. Within the industry, digital revenues improved 6.9% to $6.9 billion and accounted for 46% of all global music sales. The report reveals that during the year, there was an increase in digital subscription revenues which grew 39% over the year to offset the 8% decline in download sales. Globally, paying users of subscription services improved 46% to nearly 41 million. Billion Dollar Unicorn club member Spotify is reaping benefits from this growth.

Spotify’s Offerings

Stockholm-based Spotify was founded in 2006 by serial entrepreneur Daniel Ek and Martin Lorentzon. The two developed and released the Spotify Swedish music streaming app in 2008. Their app provides listeners with access to digital music from record labels and artists. Users can search their library of over 30 million files using multiple filters like artist, album, genre, playlist, and record label. Listeners can also use Spotify to create, share, and edit playlists with other users. It is also a music discovery site that provides music recommendations based on listening history and even creates a random plalylist related to preferred artists. Besides mobile apps, Spotify has also expanded their market reach through tie-ups with companies like Sony to allow listeners to stream music through the PlayStation.

Earlier this year, Spotify also announced plans to significantly expand their content. Their management realizes that their listeners are interested in additional content including news, weather, traffic reports, and podcasts. They are commissioning original content and are also acquiring content such as video clips from late-night comedians Jimmy Fallon and Jimmy Kimmel, ESPN studio shows, and shows from publishers such as BBC and Condé Nast Entertainment. They are currently testing the video market with short ad-free clips.

Spotify’s Financials

Spotify operates on an ad-based and a subscription-based model. They have more than 60 million active subscribers to their service, of which nearly 15 million are paid subscribers. The free subscription model is supported through advertising revenues. Subscribers can upgrade to a $9.99 per month rate plan to get an ad-free service that also allows them to download and listen to music offline.

Spotify has seen strong revenue growth. Revenues for fiscal 2014 grew 45% to $1.3 billion. Losses over the same period have grown three times to over $210 million. But that hasn’t stopped the company from attracting investors.

Spotify has been venture funded so far with $1.1 billion in investments from Asset Management Partners, Baillie Gifford, D.E. Shaw & Co., Discovery Capital, Goldman Sachs, GSV Capital, Halcyon Asset Management, Lansdowne Partners, Northzone, Rinkelberg Capital, Senvest Capital, Technology Crossover Ventures, TeliaSonera, Alexandre Mars, AFSquare, Fidelity Ventures, Lakestar, The Coca-Cola Company, 137 Ventures, Accel Partners, DST Global, Kleiner Perkins Caufield & Byers, Founders Fund, Sean Parker, Horizons Ventures, and Li Ka-shing. Their last round of funding was held last month when they raised $526 million at a valuation of $8.5 billion. Their valuation has grown four times from the $2 billion valuation that they were at, back in 2012.

At $8.5 billion valuation, Spotify is operating at a revenue multiple of 6.5 times which seems rather high. Rivals like Pandora are trading at a market capitalization of $3.2 billion with annual revenues of $920.8 million and a net loss of $30.4 million.

Besides valuation, Spotify’s competition is also on the rise. Recently, Apple entered into the segment by leveraging their acquisition of Beats Music. Apple Music was launched at the end of June and while the app hasn’t received as many positive reviews as expected, it is still posing a big threat to the likes of Spotify. Some reviewers find Apple Music “messy, slow to load, complicated to setup, and missing some social features.” But despite its initial flaws, the market is happy with the service’s catalogue of over 30 million songs, access to music videos, and above all an impressive discovery engine that offers new playlists and albums to the listener based on the music choices they made at the time of setting up their accounts.

More investigation and analysis of Unicorn companies can be found in my latest Entrepreneur Journeys book, Billion Dollar Unicorns. The term Unicorn was coined in a TechCrunch article by Aileen Lee of Cowboy Ventures.

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To give entrepreneurs all over the world access to Silicon Valley’s knowledge, methodology, and network, I founded the One Million by One Million (1M/1M) global virtual incubator. 1M/1M aims to nurture a million entrepreneurs to reach a million dollars each in annual revenue and beyond, thereby creating a trillion dollars in global GDP and ten million jobs.

For those still testing the waters of entrepreneurship, I’ve written my Entrepreneur Journeys book series to inform and inspire. My newest book, Billion Dollar Unicorns, is now available from Amazon.

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Photo credit: Johan Larsson/Flickr.com.