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Music is a $15.7 billion annual business. With so much cash sloshing around, it’s not surprising that technology companies are changing the game.
It all started with Napster back in 1999 . . . an illegal site that made music completely free (until it was shut down).
Online music is now 100% legit, and two companies are battling for market share.
The first is Apple (NASDAQ: AAPL), in Cupertino, California. And the second is the underdog, Spotify, from Stockholm, Sweden.
Spotify is preparing for a secret and unusual IPO (click here for details on the Spotify IPO).
Now, you might think that Apple was winning. After all, it’s the most valuable company in the world with an $807 billion market capitalization.
Apple’s iTunes offers music to consumers in two ways. First, they can purchase songs ($1.30) or albums ($12 on average). The second route is to purchase an Apple Music streaming subscription for $9.99 per month.
The streaming music business is growing at 30%, thanks to the simple proposition:
Pay $10 per month for access to just about every album, with the ability to listen at home, on your phone or in the car. As long as you continue paying the membership fee, you’ll have complete access.
With that simple value proposition, music streaming has become a big business.
Bloomberg reported last year that streaming surpassed digital downloads for the first time ever. Streaming revenues in 2015 totaled $2.4 billion, and helped the recording industry grow for the first time since 2011.
At Apple, music is a small piece of the business. The company makes most of its money from the iPhone, followed by other devices including the iPad and iWatch.
Meanwhile, Spotify is an eight-year-old standalone company that’s completely focused on streaming music. It’s a pure play, giving investors direct exposure to this high-growth market.
As a result of that hyper-focus, Spotify is also dominating the streaming music business (it also charges $9.99 per month).
As of March, Spotify reached 50 million paying subscribers. The service is live in 60 markets around the world, and it has a catalog of 30 million songs. The service also has another 50+ million registered free users, who listen to music with commercials.
Spotify’s growth is impressive. Paying subscribers grew 25% in the last six months. And the company’s subscription business is operating at a $5 billion annual run rate (exclusive of advertising revenues).
Rapid Growth of Music Streaming
So, how does this compare with Apple?
The latest numbers are from December 2016. At the time, Apple reported 20 million paid streaming subscribers.
This huge market ̶ and its rapid growth ̶ is attracting a lot of attention to Spotify.
Venture capital investors have already kicked in $1.5 billion since 2006. The last financing took place at an $8.5 billion valuation.
More recently, the company’s valuation on the private market has jumped to $13.3 billion. That would make it the fifth most valuable privately held American company with venture capital financing.
Spotify IPO: An Unusual Offering
Right now, Spotify is privately held.
Shares are available through this secret pre-IPO investing loophole.
Spotify is planning to go public on the New York Stock Exchange in an unusual transaction that bypasses Wall Street’s investment banks.
That means the stock could begin trading within a couple of months. Details are scant at the moment and the company is holding its cards close to the vest.
Investors have two simple choices.
Option #1 is to wait for the Spotify IPO to begin trading ̶ likely at a 20% to 30% premium.
Option #2 is to buy pre-IPO shares right now ̶ at a discounted price.
Go right here for details on this unusual Spotify IPO situation.
Good Investing,
Ian Wyatt