Spo­tify girds for Ap­ple’s chal­lenge

A newly closed round of fi­nanc­ing gives it $526 mil­lion and a value of $8.5 bil­lion.

Los Angeles Times - - BUSINESS - By Ryan Faugh­n­der

Fast-grow­ing mu­sic stream­ing com­pany Spo­tify is armed with half a bil­lion dol­lars in new fund­ing as it faces its most for­mi­da­ble chal­lenger yet — Ap­ple.

Spo­tify’s newly closed $526-mil­lion fi­nanc­ing round puts the pri­vately held firm’s value at $8.5 bil­lion, ac­cord­ing to peo­ple with knowl­edge of its f inances. The amount makes the stream­ing ser­vice worth more than twice the mar­ket cap­i­tal­iza­tion of In­ter­net ra­dio gi­ant Pan­dora.

An­a­lysts say the money will help Spo­tify bring in more cus­tomers by wag­ing ad cam­paigns, ex­pand­ing into un­tapped coun­tries and im­prov­ing its ser­vice with new fea­tures.

Spo­tify said Wed­nes­day that it now has 20 mil­lion sub­scribers who pay $10 a month for un­lim­ited, com­mer­cial-free ac­cess to mu­sic on the Web, dou­ble its num­ber from May last year. That puts it well ahead of es­tab­lished ri­vals like Deezer (6 mil­lion pay­ing sub­scribers) and Rhap­sody (2.5 mil­lion).

But Ap­ple is mak­ing its move onto Spo­tify’s turf. The Cu­per­tino, Calif., tech gi­ant on Mon­day un­veiled its Ap­ple Mu­sic ser­vice, which in­cludes on-de­mand ac­cess to 30 mil­lion songs and a 24-hour live ra­dio sta-

tion. Ap­ple is com­ing into the mar­ket with plenty of cash to spend on mar­ket­ing, plus a huge user base of 800 mil­lion iTunes cus­tomers to con­vert.

Spo­tify has done lit­tle ad­ver­tis­ing so far. But its free op­tion, which makes money from com­mer­cials, has helped it build a big au­di­ence. About 55 mil­lion peo­ple use the free tier, which in­cludes on-de­mand Web ac­cess and a limited mo­bile phone app.

“It’s go­ing to be a func­tion of how well they hold on to their early po­si­tion,” said Joe Rapolla, a mu­sic pro­fes­sor at Mon­mouth Uni­ver­sity and for­mer record la­bel ex­ec­u­tive. “It’s theirs to lose at this point.”

It’s un­clear if Spo­tify is wor­ried about Ap­ple Mu­sic, which will not have a free tier. Spo­tify Chief Ex­ec­u­tive Daniel Ek re­sponded cryp­ti­cally to Ap­ple Mu­sic’s de­but, tweet­ing only two words: “Oh ok.” He then deleted the tweet.

Spo­tify has ramped up its ser­vice with video, pod­casts, playlist rec­om­men­da­tions and a fea­ture for run­ners. It is li­cens­ing videos from the likes of Vice News, Nerdist In­dus­tries and Vi­a­com’s Com­edy Cen­tral and MTV. It has struck deals with video com­pa­nies that make con­tent for YouTube, in­clud­ing Maker Stu­dios and Fullscreen, as well as tra­di­tional play­ers such as NBC-Uni­ver­sal, ESPN and Turner Broad­cast­ing.

The stream­ing ser­vice has also ex­per­i­mented with pric­ing schemes, in­clud­ing stu­dent dis­counts and a trial pe­riod of $1 for the first three months.

The in­fu­sion of funds could help Spo­tify get into new mar­kets where peo­ple are just be­gin­ning to use mo­bile de­vices.

An­a­lysts said the com­pany prob­a­bly will ex­pand its global reach through deals with mo­bile car­ri­ers that could bun­dle the ser­vice with their phone data plans. Spo­tify has al­ready struck such pacts with tele­com firms in Ger­many, France, New Zealand and other coun­tries. Spo­tify, which cur­rently is not prof­itable, is also widely ex­pected to pur­sue an ini­tial public of­fer­ing or be ac­quired by a larger tech com­pany.

Whereas Spo­tify is now avail­able in 58 mar­kets, Ap­ple Mu­sic is ex­pected to launch in 100 coun­tries on June 30.

As part of the fi­nanc­ing round, Spo­tify re­ceived a $115-mil­lion in­vest­ment from the pub­licly traded Stock­holm-based tele­com firm Telia-Son­era in ex­change for a 1.4% stake.

U.S. com­pa­nies par­tic­i­pat­ing in the Spo­tify fund­ing in­clude Hal­cyon As­set Man­age­ment, GSV Cap­i­tal, D.E. Shaw & Co., Tech­nol­ogy Cross­over Ven­tures, North­zone and P. Schoenfeld As­set Man­age­ment, said a per­son familiar with the mat­ter, who was not au­tho­rized to com­ment pub­licly.

Bri­tish in­vest­ment firms Bail­lie Gif­ford, Lansdowne Part­ners and Rinkel­berg Cap­i­tal, along with Canadian hedge funds Sen­vest Cap­i­tal and Dis­cov­ery Cap­i­tal Man­age­ment, also took part.

The new round, first re­ported by the Wall Street Jour­nal, brings Spo­tify’s fundrais­ing to $1 bil­lion to date.

Ap­ple’s big­gest hur­dle will be get­ting users to pay for its mu­sic, es­pe­cially those who grew up in the post-Nap­ster era and are used to get­ting songs for free through YouTube and piracy sites, an­a­lysts said.

And free mu­sic has proved to be a pow­er­ful draw. It at­tracts about 76 mil­lion users to Pan­dora a month, ac­cord­ing to the Oak­land com­pany’s reg­u­la­tory fil­ings.

While Spo­tify’s free tier has helped cut down on il­le­gal down­loads, the com­pany has taken flak from prom­i­nent artists be­cause of the low roy­al­ties from ad- sup­ported stream­ing.

Spo­tify has de­fended its strat­egy, say­ing the free tier has en­ticed mil­lions of peo­ple to sub­scrip­tions. The com­pany also says it has paid $3 bil­lion in roy­al­ties to record la­bels and mu­sic pub­lish­ers, in­clud­ing $300 mil­lion in the first quar­ter of this year.

Ap­ple’s deal­ing with the mu­sic in­dus­try has also at­tracted scru­tiny. At­tor­neys gen­eral for New York and Con­necti­cut are in­ves­ti­gat­ing Ap­ple’s ne­go­ti­a­tions with the mu­sic com­pa­nies for the ser­vice, to see whether they worked to­gether to sup­press the avail­abil­ity of free, ad-sup­ported plans of­fered by Spo­tify, YouTube and oth­ers.

The Ap­ple Mu­sic ne­go­ti­a­tions also are be­ing in­ves­ti­gated by the Euro­pean Com­mis­sion.

Mark Mul­li­gan, a mu­sic in­dus­try an­a­lyst at re­search firm Midia, said it’s pos­si­ble that Ap­ple will emerge as the mar­ket leader in sub­scrip­tion mu­sic stream­ing. Still, he said, the mar­ket will be big enough for both Spo­tify and Ap­ple Mu­sic to co­ex­ist.

“This is not go­ing to be a win­ner-take-all mar­ket,” Mul­li­gan said. “Spo­tify has enough money to en­sure it will be able to com­pete around Ap­ple for a while.”

Don Em­mert AFP/Getty Images

SPO­TIFY CEO Daniel Ek re­sponded cryp­ti­cally to Ap­ple Mu­sic’s de­but, tweet­ing only: “Oh ok.”

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