Three reasons why I’d buy stock in a Spotify IPO

The debate over the future of the streaming music industry has me depressed. Executives, it seems, are incapable of divining what listeners want out of the music industry. I’ll try to distill it down: we want a Netflix for music. We don’t want a download-driven iTunes for music. We don’t want a custom-radio radio station (ala Pandora or Slacker) for music or a cloud-based music storage system. We want a subscription-based service that gives us access to millions of songs that we can listen to on demand.

The only company that seems to have figured this out is Spotify – a Swedish start-up that’s reportedly nearing a $100 million financing deal with venture capital tech titan Digital Sky Technologies (DST). DST’s well-known for investing in late-stage start-ups that are nearing an IPO. They own 10 percent of Facebook, for instance. They were in early on Zynga and Groupon, and now they’re ready to give Spotify a war chest as the streaming radio company looks to move into the U.S. market.

Here are three reasons why I’d buy stock in a Spotify IPO:

1) Spotify gives us full control. Lets be honest here. Part of the reason I use Pandora is because I’m too lazy to spend time transferring music onto my iPhone. I just can’t be bothered to deal with the multi-gig folders full of music I’ve built up over the years. If I can access what I want to hear when I want to hear it, I’ll pay for it. I don’t necessarily like Pandora’s model, but it’s easy. There’s just one glaring problem: Pandora doesn’t let you play specific titles or albums. You type in a song or artist you like, then get a “custom radio station” that plays similar music and – every now and then – the actual song or artist you wanted to hear in the first place. Don’t get me wrong, I’ve discovered some new bands I love (and probably wouldn’t have found any other way) while using Pandora, but they’re still leaving up that last little hurdle that’s infuriating: the inability to play a specific track. Spotify’s model gives us what’s missing in the streaming music industry: full control.

2) Subscriptions save me money. If Spotify’s music catalog is good enough when the company launches in the U.S., I’d be more than happy to fork over $15 a month to gain access to millions of songs. In essence, users would get an entire music store of albums for the cost of a single CD. This is precisely like the Netflix, Inc. (NASDAQ:NFLX) model; the model that brought down Blockbuster. If I were renting DVDs from a brick-and-mortar store at $5 a pop rather than streaming movies from Netflix, I’d easily be spending $50 or more a month.

3) Subscriptions offer steady revenue. The beauty of Spotify’s model comes from a long-term base of steady revenue – something most tech start-ups are lacking (i.e. Twitter). Lets say Spotify snags 20 million subscribers (Netflix’s total) at $15 a month; that’s good for $3.6 billion in revenue every year. That kind of money will buy you a lot of bandwidth and give you a whole lot of cash to use while negotiating deals with record labels.

So long as Pandora and Apple cling to models that provide a sub-par user experience, I’m betting all my chips on Spotify. Now, let’s just cross our fingers that an IPO is in the works.



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