Investors Flock to Music Streaming Services as Spotify's Value Tops $4 Billion

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Spotify's Daniel Ek

A new study shows digital music becoming a $12.2 billion industry by 2016, topping physical sales.

This story first appeared in the Dec 6. issue of The Hollywood Reporter magazine.

Savvy investors are jumping into the stream. According to PricewaterhouseCoopers, the worldwide digital music industry is expected to grow 7.5 percent annually over the next four years and become a $12.2 billion industry by 2016, overtaking physical music sales.

So it was no surprise when news leaked Nov. 21 that Technology Crossover Ventures led a $250 million investment round into Spotify that valued the unprofitable subscription-music service at $4 billion. Almost exactly a year ago, the Swedish company, founded by Daniel Ek in 2006, raised $100 million in a round that valued the company at $3 billion. During the same timeframe the value of rival service Pandora, a publicly traded company, soared 300 percent, to a valuation of $5 billion.

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TCV, which declined comment, is no novice when it comes to digital entertainment, having invested in Netflix, Facebook and others. But in Spotify it is making a bet on a relative underdog. The same day insiders acknowledged TCV's investment in Spotify, which has 20 million active users, Pandora disclosed that it has 72.7 million active users.

Spotify also faces competition from other major players, including Sirius XM Radio and iHeartRadio from Clear Channel Broadcasting. And when Apple entered the fray with iTunes Radio on Sept. 18, some posited it would be a "Pandora killer." But after the dust settled, Pandora CEO Brian McAndrews said there were "modest declines" for a few weeks after iTunes Radio launched before U.S.-based Pandora returned to growth in October.

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Pandora may be the 800-pound gorilla, but there's room for Spotify and many more in the $50 billion worldwide music industry. "First-mover advantage is huge, and in that regard Pandora is well-positioned in the U.S., but I see a gradual slowing in their growth momentum due to competition," says Northlake Capital's Steve Birenberg.

Some also note that the rich valuation for Spotify is more evidence of the strength of the on-demand digital marketplace. "It means that investors really like over-the-top delivery of content," says Michael Pachter of Wedbush Securities.