On its first day as a public company, Spotify wants Wall Street to remember May 23, 2002, the day when a small DVD-by-mail service began selling its stock at $15 per share. Netflix had fewer than 700,000 subscribers, a valuation around $300 million, and a big dream to reorganize the media universe around subscriptions. Today, it’s worth $130 billion, counting powerful media giants like Disney and Comcast as peers instead of predators. Barry McCarthy, the chief financial officer who guided Netflix from its IPO and into the streaming era, now has the exact same role at Spotify. “This reminds me of my first 10 years of Netflix,” he said at an event meant to whip up investor excitement in March.
But it’s just as easy to believe that Tuesday will be remembered like June 15, 2011, when Pandora went public amid a buzzy period for tech stocks. Though the internet radio platform had a fast-growing user base and a successful IPO, Pandora has suffered from stalled-out user growth and an inability to transform semipersonalized radio ads into consistent profits. This year its stock has flatlined at around a third of its IPO price.
Which fate awaits Spotify? On day one, investors seem to be predicting that the music-streaming service will be more of a Netflix than a Pandora. Spotify’s stock opened at $165.90 on Tuesday, giving it a valuation of nearly $30 billion. The success of the company’s Wall Street debut is tricky to measure because Spotify eschewed a traditional IPO in favor of a direct listing. Instead of selling a predetermined number of shares in a carefully orchestrated dance between investment banks and large-scale investors, Spotify essentially sauntered onto the New York Stock Exchange with a shrug, leaving it to the market to figure out what the company’s stock price should be and how many shares should be sold. “No one knows for sure how Spotify’s not-IPO will fare on Tuesday,” wrote Bloomberg columnist Shira Ovide, whose job is to at least sort of know how these things might play out.
Spotify had previously traded on private markets at a high of $132 per share, and the NYSE set a reference price at that figure to give investors some kind of yardstick. By that measure, Tuesday was a big win for the company. The Swedish startup that once topped Taylor Swift’s extremely long list of enemies began the day on pace for the third-biggest U.S. tech IPO of all time—and got an exclusive Swift music video to boot. It’s a multiple-fire-emoji moment, to directly quote Spotify CEO Daniel Ek.
But Spotify isn’t taking too much time to celebrate. Ek chose not to ring the opening bell at the NYSE (for the best, considering the organization accidentally hung a Swiss flag outside its building instead of a Swedish one). And while Spotify is now a music-industry giant on paper, the company didn’t actually raise any new money due to its direct listing. With investors, industry watchers, and the press now privy to Spotify’s financials, the fundamental challenges in the company’s business model will only come under more intense scrutiny.
Like Netflix, Spotify has successfully convinced tens of millions of people to pay a monthly fee to swim in a seemingly infinite pool of entertainment. Both companies have brands that are bigger than any specific artist, which is why Spotify can lose Beyoncé and Netflix can drop 30 Rock without also shedding subscribers. And they’ve both managed to go from being dependent on the entertainment world’s gatekeepers to taking control of the gates themselves.
But just like Pandora, Spotify also has a vast number of customers who use its service for free. And like Pandora, the company must pay royalties on its music every time a song is streamed. For every scrap of revenue clawed back by negotiating better terms with record labels, Spotify often finds the money going out the door some other way, like a new law increasing songwriter rates. The company wants to control its own destiny, like Netflix now does, but it’s caught in a web of royalty contracts and mechanical licenses.
Dig deeper into Spotify’s financials and you’ll find more contradictions. Spotify’s gross margins are improving (meaning it’s managing its expenses more efficiently), but its average revenue earned per user is declining (meaning the user base needed to turn profitable is growing ever more distant). More than two-thirds of listening on the platform now happens via playlists, which encourages user lock-in and record label acquiescence, but 85 percent of streams are from the three major labels and the indie consortium Merlin, which means Spotify can’t really risk losing any of its key content providers.
Perhaps these conundrums were weighing on investors’ minds as the company’s stock slid over the course of the day, closing at around $149 per share. That’s more than 10 percent off where Spotify started the day, but still 13 percent above what it was valued at before it went public. If Spotify can meet its aggressive growth targets this year—it wants 96 million paying subscribers by the end of 2018—investors may gain more confidence in the company’s precarious business model. Today people seem split on whether Spotify is streaming’s next great success story or its next cautionary tale.