Thoughts on the Spotify IPO

When Spotify announced their IPO awhile ago, I was surprised they were even going for an IPO because of their financials. I'm not going to make this post a deep dive into the financials of Spotify but more on a layperson's thoughts on something like this IPO.

I've used Spotify since the very first day they launched in the US, I'm a huge fan. The product has incrementally gotten better over time, so much that I'm amazed at how well the team has been able to iterate and slowly but surely move the product forward. The music discovery and radio have improved, enough to the point that I cancelled my subscription to Pandora about 6 months ago because I felt like Spotify was close enough in the suggestions that I was wasting my money on Pandora at that point.

Spotify's a good product but I'm not too keen on the business model. Software usually wins when it scales well, the initial effort is huge but over time the number of users start to match the effort and surpass it. Economies of scale work very well for software companies but I think that's not the case for Spotify.

Spotify's biggest issue right now is paying record labels. You can't have popular artists on your platform without paying big record labels. I'm thinking early on it was a side business for record labels but as CD and digital sales have gone down and streaming has become a popular option for consumers, they've started paying more attention to it, money has started rolling in. This means Spotify is at the mercy of record labels, they're going to need to renegotiate better contracts and if they can't they're going to have to pay whatever the record labels are asking. Of course, this is pretty baseless and opinionated but I'm sure it's not far off from the truth. 

As the user base grows, the amount of songs being heard grows as well, this means more money will need to be paid out to the record labels. Ignoring bandwidth and user acquisition costs, the cost of paying record labels increases as users increase and that means it's going against the phenomenon of economies of scale. It sounds to me like Spotify is getting paid by users, taking that money and paying record labels, paying operating costs, and probably not having much money left after, this might not be the best investment to make right now. 

I'm personally waiting to see how they do during their first quarter being public and then I'll decide if I should buy their stock or not. Currently, I own no Spotify stock and I am not affiliated with Spotify. These are all just opinions so please don't take it as facts or investment advice. 

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