Inside Spotify's Unusual IPO: "This Has Never Been a Normal Company"

6:45 AM 12/21/2018

by Natalie Jarvey

The music streamer, part of The Hollywood Reporter's year-end Rule Breakers issue, skipped institutional investors and listed directly on the NYSE, to a healthy share price and zero volatility. The Hollywood Reporter weighs in on why it worked.

Spotify_IPO_ONE TIME USE - AP - H 2018
AP Photo/Richard Drew

Most startups follow a pretty standard route when they go public, raising funds by issuing new shares to institutional investors that then sell them to the public. But Spotify circumvented that process in April when it listed its existing shares directly on the New York Stock Exchange.

"Spotify has never been a normal kind of company," CEO Daniel Ek wrote in a blog post about the decision. Being abnormal worked for the Swedish music streamer: The stock debuted at a price just short of $166 per share and didn’t exhibit any of the volatility that some experts feared. The direct listing is "now a viable option," says Renaissance Capital IPO strategist Matt Kennedy, but he adds, "Just because Spotify pulled it off doesn’t mean any company can."

THR weighs in on why it worked.

  • Reference Price

    Advisers Citadel and Morgan Stanley’s reference price of $132 per share was crucial in guiding the stock through a smooth first day of trading and a $149.01 close. Spotify shares are down more than 20 percent from their debut price because of a market-wide "tech wreck," but the stock is still hovering near that initial reference point. "That price discovery process seemed to work reasonably well," notes RBC Capital Markets analyst Mark Mahaney. "In a market that really changed dramatically, it’s largely held."

  • Name Recognition

    With 87 million paid users, Spotify is already a household name. And it has an easy-to-understand business model that draws comparisons to Netflix. That’s valuable when selling shares directly to the public and without a bank to help drum up interest with investors. Only the biggest companies — think Uber or Airbnb — would be able to draw the level of interest needed, says Kennedy. Spotify even leaned on talent to sell itself to investors, treating them to a performance by Charlie Puth after its live-streamed investor day.

  • No Cash Needed

    Because Spotify didn’t issue new shares, it didn’t raise money like most companies that go through the public listing process. (Snapchat owner Snap Inc. raised $3.4 billion during its spring 2017 IPO.) Spotify, which had third-quarter revenue of $1.53 million, an operating loss of $6.78 million and wasn’t looking for a payday, "developed our company in a way that enabled us to go public without raising additional money," CFO Barry McCarthy has said, adding that an IPO "should not be solely about raising capital."

    This story first appeared in the Dec. 18 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.