The fast-growing online music streaming service Spotify is counting on its growth on Facebook, popularity among application developers, and increase in paid users, as key factors to support their recently estimated valuation that has investors and industry experts alike scratching their heads.
Spotify is looking to private investors for funding that could raise the company’s valuation to an estimated $3.5 billion — according to Business Insider — or $4 billion, — according to Financial Times — an amount that is a large increase from the $1.1 billion valuation they were given last summer 2011 for their U.S. launch.
According to the Financial Times, if Spotify receives the desired funding, this would exceed the $3.3 billion that Warner Music Group sold for in 2011. According to Billboard.biz, that amount is equal to what Google offered Hulu — the difference is that the popular online video service owns exclusive rights to many of its movies and TV shows, an ownership that Spotify lacks.
Founded in 2009 in Sweden, Spotify made their U.S. launch last July 2011 and has since gained significant ground in the industry, competing against other popular music streaming services like Pandora, Rdio, and Last.fm.
Spotify was one of the first services of its kind to integrate social media, allowing users to share playlists and songs with friends through Facebook. As covered by TicketNews, in January 2012, TicketMaster launched a new Facebook app that recommends nearby concerts based on a user’s Spotify music selections and his or her geographic location.
Spotify’s presence on Facebook and its integration with other popular Facebook apps has helped the service to build a case regarding the company’s valuation. According to VentureBeat, Spotify has raised a total of $189 million since its 2009 launch. The music streaming service currently has over 10 million active users, with 3 million of those users paying a subscription fee, according to the Financial Times.
While Spotify has proven that they can successfully convert several free users into paid users, a majority of those utilizing the site’s services use the free, advertisement-supported version. With Spotify paying licensing fees for all of its content, it is imperative that the company gain as many paid users as possible in order to generate sufficient revenue. According to VentureBeat, investors are wary of the fact that Spotify lacks ownership of the music that is available through its music streaming service. Instead, they pay a fee to labels with each song that is played from the Spotify database.
In November 2011, Spotify turned their company into a music platform, allowing developers to integrate Spotify’s streaming services within their apps using a JavaScript API. Although there are no monetization possibilities associated with the apps, such expansions help Spotify promote its services while leveraging itself as the best in its genre, and gaining the attention of investors.
Spotify announced on March 29, 2012 that it would extend unlimited free listening for its U.S. listeners in response to their successful launch. Free users are typically limited to 10 free hours of music per month, and only five plays per track. Premium users can stream music from the Spotify library using their mobile devices, and can also listen offline by syncing their playlists with their cellphones.
By extending the free service to its users, Spotify hopes that consumers will be more inclined to try the music streaming service without risk, and later opt to sign up for the paid service to gain access to those additional features that are not available with the free, ad-supported version.
According to The Los Angeles Times, it is possible that Spotify is compensating for the losses incurred by extending the free service by selling more advertisements — a move that would put investors more at ease.