This week saw another major tech launch on the New York Stock Exchange (NYSE) when a Swiss flag flew to mark the launch of a Swedish company (whoops)! At the end of trade, Spotify had a market capitalisation of almost US$30 billion. Not bad for a company that was only created ten years ago and is yet to turn a profit. You read that correctly. Spotify has lost money each and every year of its existence so far.
Why, then, were 30 million shares traded throughout its first day and the price was pushed up 13 per cent by the end of trade?
To answer that question, we need to go back in time. Not that far back – just before 28 April 2003. Before that date, music lovers across the world would walk into a music shop and buy a vinyl record or cassette tape or Compact Disc (CD). The CD and DVD revolutionised the music and video industries and were the killer products that changed those industries forever.
Well, at least until the next big thing came along.
Well, that next big thing came along in 2003. Apple opened the iTunes Music Store on 28 April of that year with 200,000 songs for you to buy and download – coinciding with the release of the third-generation iPod. In the first week, iTunes Store customers bought over one million songs. It was a logical approach from Apple and it appealed to consumers. Why buy an entire album from an artist for twenty dollars when you could download just the individual songs you wanted for 99 cents? Apple had disrupted an entire industry and the downloads kept flowing. At its peak, it wasn’t taking a week to sell a million songs – every hour over 1.4 million songs were being sold. After only seven years, Apple was the largest music vendor in the world and eventually reached a 29 per cent mark share of all worldwide daily sales.
Just when Apple thought they had the model perfected and a nice income stream they could sit back and just count each day, other people around the world were looking for the next, next big thing.
That turned out to be streaming in general and Spotify specifically.
When Apple asked the question whether it was better to buy songs individually rather than buy an entire album, the world collectively said yes.
When Spotify asked the consumers of the world if they thought there was a better model than buying individual songs, again the world answered with a yes. Paying for one song that you may listen to a few times compared to paying a small monthly fee and having access to 30 million songs seemed like an easy argument. And so it came to pass. Apple Music and other providers of individual song sales were out and streaming services were in. This revolution relied on external influences though – fast, reliable and cheap Internet connectivity from a mobile device was essential.
So while Apple was napping, Spotify came in and disrupted the already disrupted market. There are others of course. Pandora; iHeartRadio; Amazon Music; Deezer and many more. The reason we talk about Spotify is based on numbers. 140 million users with 70 million of those paying subscribers. Double the number of any competitor. Apple Music is trying to play catch-up but with less than 40 million subscribers they have some way to go.
Back to my original question. How can a ten-year-old company that has continually lost money be valued at almost US$30 billion on its launch day? The future. Spotify, for the moment at least, is the future. With 70 million paying subscribers and the fact that Apple makes money with about half that number, it is only a matter of some small tweaking to go from losses to profits. Investors are banking on the future of streaming and the incredible number of subscribers that Spotify has access to.
I can hardly wait to see what the next, next, next big thing is!