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Spotify, the global leader of the music streaming industry
even in the face of mounting competition from tech giant Apple
Music <AAPL.O> - has posted steep losses since it was created a
decade ago by Swedish founders Daniel Ek and Martin Lorentzon.
"Up until now, I think it's been growth, growth growth,"
Par-Jorgen Parson, a general partner at venture capital firm
Northzone, told Reuters on the sidelines of tech start-up
conference Slush in Helsinki.
"Maybe profitability will start to become a priority too." Asked
if that profitability could come as early as next year, Parson
said: "Absolutely, yes."
Spotify, which based on a funding round last year had a value of
over $8 billion, reported an operating loss of 184.5 million
euros ($195.5 million) in 2015, up from 165.1 million in 2014.
A valuation of $8 billion would be Europe's biggest tech listing
since the market launch of German e-commerce investor Rocket
Internet <RKET.DE> in 2014.
Spotify, present in 60 markets worldwide, charges users monthly
fees for access to huge libraries of music to play on phones or
computers, but profits largely depend on royalty licensing deals
it strikes with powerful music labels every few years.
Northzone first invested in Spotify in 2008 and though it does
not say how much it owns today, it remains the second-biggest
shareholder after the founders. Other investors include Creandum,
DST Global and Accel Partners.
Spotify, which has been cited as a possible acquisition target
for a Silicon Valley giant like Facebook <FB.O> or Google's
Alphabet <GOOGL.O>, is widely seen as a prime candidate to go
public on the Nasdaq in 2017.
"As an investor - and I've been in the company now for almost 10
years - we're looking forward to an IPO at some point in time,"
said the New York-based Parson, declining to be more specific
about IPO plans.
A listing by Spotify, which employs about 2,000 people, would be
a boon for Europe where tech firms tend to sell early, getting
swallowed up by bigger fish in Silicon Valley or China.
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Ek said earlier this year he has no plans to sell.
HIGH COSTS
Parson explained that the cost of growth for Spotify has been very
high because, as it expands to new markets, it has to pick up the
initial cost for music royalties for new users and it takes time
before it can generate advertising or subscription revenues from
each additional subscriber.
"But the moment that we start to optimize on profitability rather
than growth, then these unit economics will kick in right away, and
they are really solid, and have been for quite some time," said
Parson, who penned a book called "Heavy Metal Management".
Some analysts have argued Spotify's business model is flawed and it
is hostage to the record labels. But with 40 million paid users, the
company could be near a tipping point and may have greater leverage
in its negotiations with the music industry.
Apple said in September Apple Music, launched in 2015, has 17
million users and is available in over 100 countries. Amazon's music
service, launched this year, was competing more with another
independent player, Pandora Media <P.N>, rather than Spotify's user
base, Parson said.
The focus for 2017, he said, will be addressing the needs of
artists, helping them plan tours or driving merchandise or ticket
sales.
Spotify continues to expand. It just launched in Japan and has its
eye on markets like China, Russia and South Korea, he said. Parson
believes Spotify is in full control of its destiny.
"I don't see any scenario where the founders are letting go of the
control," he said. "Daniel and Martin - I think they have found
their calling in life."
(Reporting by Mia Shanley; Editing by Alistair Scrutton and Keith
Weir)
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