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Spotify's about to go public, but can it turn a profit?

Daniel Ek is the CEO and founder of Spotify, which is based in Sweden.
Daniel Ek is the CEO and founder of Spotify, which is based in Sweden.
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If you’re among the many millions of Spotify subscribers, you’ve probably spent a lot of time listening to the streaming service. In about a month, you can now spend money owning stock in the service.

Spotify has just announced its plans to go public, which could value the company at more than$ 20 billion. Ahead of the stock offering in late March or early April, the Swedish music company has disclosed its finances, for the first time ever. Like a lot of hot start-ups, Spotify has lots of revenue, but is far from profitable yet. And as it outlined in its prospectus, there are many serious issues that could threaten its future.

For details our host John Horn chatted with Shirley Halperin, executive editor of music for Variety. She wrote about some of the challenges facing a publicly-traded Spotify. 

Interview Highlights

On the details of the public offering: 

It needs to show some path to profitability that goes beyond the system that they have right now, which is that nearly 90 percent of their content is owned by four other companies: the three major labels and then Merlin, which represents the independent labels. So, yes, the margins are razor thin because they don't really own the content. They need to find other ways in. Advertising is one way. Another way to do it is by selling its data. That's something that I think the music industry has kind of been waiting for. That they would be able to offer analyses to record companies, to publishers, to artists directly, that show them who's listening to their music, when, which parts of the world, how often, what are the most popular songs and companies can use this to better a career, whether that means rerouting a tour or doing special initiatives or campaigns in certain territories. So those are the two obvious things.

Less obvious, and hinted about in other ways, is that Spotify could make a hardware play. They could get into literally creating a product. That's something we've only learned about recently through job listings the company has posted. It seems like these sort of three prongs are the way they are going at it. In terms of how much money they stand to make when a single Drake song is played on the service, it's very little. 

On Spotify's mysterious job listings:

They're very interesting because they're somewhat mysterious. They're asking for people who have experience within hardware production and engineering. And it says in the public offering that about 40 percent of their staff, which is nearly 3,000 people, work in engineering. It also says Spotify is on its way to creating its first physical products and setting up an operational organization for manufacturing, supply chains, sales and marketing. That's from another job listing. There's clearly something physical coming. I think the music industry is incredibly curious, obviously since the iPod and the iPhone, nothing has been a giant disrupter on the hardware side. I can't even tell you exactly what this is, but I'm sure it's going to be competing with Amazon's Echo, and Alexa, and HomePod and everything else that's coming our way.

On where Spotify is headed:

This is kind of what we've expected for a long time. This public offering has been talked about and buzzed about for the better part of a year-and-a-half. The part that interested me the most is that Spotify sort of threw up its hands when it comes to explaining the complexities of rights management in the U.S., and the way performance loyalties and copyright and all of those rates are determined.

To see a company with such smart individuals as [co-founder] Daniel Ek and [Netflix chief content officer] Ted Sarandos on the board, to see a company say, You know what? This is really complicated, we can't really explain it, we can barely get our heads around it but we're going to keep pressing on, getting as many licenses and clearing as many songs as we can. That was kind of interesting. The U.S. does have a problem when it comes to royalties and the way that songwriters get compensated. And Spotify, weirdly, is in the middle of it. 

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