- Gary Gershoff/Getty
- The music-streaming company Spotify is set to go public Tuesday through a direct listing – meaning it won’t issue new stock but will allow insiders to sell shares on the public market.
- Lakestar, a small shareholder and early investor, says it will not be selling its shares.
- Lakestar’s founder and CEO, Klaus Hommels, says he thinks Spotify can be a $100 billion company with 700 million subscribers.
- But Spotify still has to compete against big rivals such as Amazon and Apple and to work out how to turn a profit while paying royalty fees out to labels and rightsholders.
When Spotify floats on the New York Stock Exchange on Tuesday, it’s a chance for investors and insiders to sell their shares on the public market.
But there’s one early backer that apparently won’t be selling its holding: the European venture-capital firm Lakestar.
The firm’s founder and CEO, Klaus Hommels, who also invested in Spotify personally in 2008 before founding Lakestar in 2011, told Business Insider he was committed to a future vision of Spotify as a “$100 billion company” with an eventual subscriber base of 700 million users.
“For sure we won’t sell,” he said. “If you are in the [investing] business as long as I am, you … have committed so many mistakes on your way by selling too early that the thing you learn is not to be influenced by momentary emotional overreactions. My clear view – and it’s also the banks’ view – is that Spotify should be a more than $100 billion business. This listing is a little time window in its journey. We don’t think we should sell.”
An earlier investor at GP Bullhound pegged Spotify’s valuation at about $20 billion. The company has predicted it will have up to 96 million subscribers by the end of its fiscal 2018.
Hommels wouldn’t reveal his or Lakestar’s stake, but it will amount to a small percentage of Spotify’s overall business. Spotify listed out its major shareholders in documents filed to the US Securities and Exchange Commission in February, and Lakestar was not on that list. According to Crunchbase, Lakestar most recently participated in a funding round for Spotify in 2012, since which the company has raised a growth round and debt financing.
Hommels said there were three ingredients to merit the valuation he gave the company.
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The first is that millions of people around the world have yet to discover streaming. The way most people can access music in markets without streaming is to buy a CD and put it in a CD player, which is prohibitively expensive. (Hommels doesn’t mention that people with cheap phones in developing markets could probably just stream off YouTube.)
The second is that Spotify already has “broad distribution” – in other words, it’s the biggest music-streaming service globally.
And finally, Hommels pointed to Spotify’s executive team, which he called “unbelievably committed” and “highly gifted.” Hommels specifically praised CEO Daniel Ek’s vision for music and that fact he was “not driven by money.” He also praised CFO Barry McCarthy, a Netflix veteran and the driving force behind Spotify’s unusual direct listing.
Spotify can beat Apple and Amazon because music isn’t just a ‘side product’ to sell hardware and services
Spotify may be the most popular streaming service now, but tech giants like Amazon and Apple offer rival services with added extras.
Amazon Prime Music comes free with the wider Amazon Prime subscription, which has added benefits such as one-day deliveries and original shows on Prime TV. Apple Music is newer and has struggled to dent Spotify but plans to expand and offer more original content. Apple also has a lot of cash.
Hommels didn’t name-check Amazon or Apple specifically but said Spotify’s rivals saw music as a side project.
“It’s a team where everyone lives and breathes music,” he said, adding that Ek “thinks hard about the problem of how to make the music industry better and how to be more helpful to artists. Executing against that is much more powerful than making music a side product of another company.”
For both Amazon and Apple, music is about bringing consumers into their wider ecosystems. Those who subscribe to Apple Music, for example, may be more likely to buy Apple’s expensive HomePod speaker. And Amazon Prime Music is a good way to upsell you into the wider Prime offering.
This, Hommels said, makes Spotify’s rivals much more dangerous to the music industry than Spotify – and that, he said, is why it isn’t in record labels’ interest to put the firm out of business through exorbitant licensing deals.
“This is the best player in the market to allow margins to rise,” Hommels said. “The other players are way more dangerous. They devalue music, put it into bundles, subsidize it with hardware. But the value of music has a different meaning with Spotify. No other company is thinking with the same interests as the music industry and artists. The whole industry has a higher interest in allowing somebody to serve them.”
He added: “Spotify has always tried to find a cooperative way with the labels. In the end, some of the biggest people profiting from Spotify are the labels currently. I think they will keep on going. For some reason, it’s always more catchy to say that if someone wins, someone else has to lose. In this case, it might not be that somebody has to lose.”