Deal Report: Spotify Valued at $3 Billion, Wins New Round of Funding

Spotify, which recently closed a round of funding today, has been valued at around $3 billion, according to a source reported by the Wall Street Journal. They attracted funding from investors such as Coca-Cola, Fidelity Investments and Goldman Sachs.

According to Spotify, of their 15 million subscribers, roughly 4 million of them are paying subscribers. Subscriptions run on average at about $10 a month. And yet, despite the promising numbers, Spotify operated at a loss of million last year, from a revenue of $236 million.

If today’s funding results are any indication, investors still seem optimistic.

To date, Spotify has raised approximately 0 million dollars.

Is Billion Too Much?

If we value Spotify at $3 billion today, we’re actually saying that it will be worth three times that ($9 billion) in a few years, a presumable time in the future when Spotify could go public.

Only time will tell, but if we use other similar media distribution services that have gone public as a litmus test for the market, like Netflix, which is valued at $4.3 billion today, the $9 billion valuation for Spotify in a few years seems a bit much. Nevertheless, Spotify has already seen that traction that investors have been looking for and gave their vote of confidence with today.

A Market Ripe for the Medium

A trend of note  to keep an eye on in the next few years is the rise of smart phone ownership, which saw a 47 percent increase in Q3 smartphone sales from the same quarter last year. As the growing smartphones segment expands market access of media distribution services like Spotify, Netflix and Hulu, the user base for these services are poised to see a relative gain as well.

Challenges Ahead for Spotify

Apart from a rapidly growing user base, which requires Spotify to manage and pay for the upkeep of server space and bandwidth, they also have to pay for royalties to the record labels for providing access to stream their artists’ music. As the number of artists that are in-demand by Spotify’s subscribers grows, Spotify will have to keep up in revenue from paying subscribers in order to finally turn a profit.

Some of Spotify’s native features that will help Spotify towards that end (as well as get a leg-up over the competition) are its personalized on-demand playlists. Whereas competitor Pandora only allows users to create “radio stations” that play a random assortment of songs similar in style to a band or artist that you set as the standard for that station, Spotify allows users to create, say, an OceanLab radio station and have only OceanLab play on that channel—a feature that is desirable if you are only in a mood to listen to one band or artist.

Users can do this already with YouTube disco, a service which allows users to create (fairly) accurate playlists of the artist or songs that they like for free. But one of the downsides of YouTube is that depending on your mobile carrier, you cannot auto-play playlists on mobile devices. Furthermore, many songs do not allow users permissions to stream to mobile. So Spotify still has a strong chance to maintain its edge on the mobile market while these limitations exist for YouTube.

One thing that is worth mentioning is that behemoth Apple, Inc has begun licensing talks with record labels to also offer streaming online radio, a development that could throw a wrench in the momentum for Spotify.

Coming up for Spotify

Spotify is also still producing a browser-based version, which could help get more desktop users excited about transitioning over to Spotify from Pandora or from YouTube playlists.

Given investors’ optimism, Spotify looks well-positioned to charge into 2013 with a fresh boost. It will remain to be seen whether they can keep that momentum going and come out on top in the online music radio arena, but they appear to be well on their way.

Edit: A gracious reader pointed out my minor mistake in the math above. The estimate valuation has been changed from $12 billion to $9 billion.

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