
Will Spotify go public without an IPO? - Heffay626
https://techcrunch.com/2017/04/07/will-spotify-go-public-without-an-ipo/
======
WhitneyLand
This is the future. The value added by investment banks does not justify 10's
or 100's of millions in fees. It's one of the biggest remaining inefficiencies
in company growth that needs disruption.

The reason it hasn't happened yet seems straightforward. Companies are
hesitant to be beta testers of a new model where so much is at stake. No one
ever got fired for running an IPO through Goldmen Sachs.

The principle of people making obscene amounts of money doesn't bother me one
bit. It would be nice if teachers had higher salaries, but NBA players make
more money than teachers for many objective reasons. This situation is
different.

Does anyone think this is the best we can do? One quick example:

[http://blogs.reuters.com/felix-salmon/2013/03/11/where-
banks...](http://blogs.reuters.com/felix-salmon/2013/03/11/where-banks-really-
make-money-on-ipos)

~~~
JumpCrisscross
You may be conflating what's going on here with a direct public offering [1].
Google, for example, did not use an underwriter in its DPO-style offering [2].
(Partly as a result, they massively underpriced.)

Spotify isn't doing a DPO nor an IPO. They will simply allow their shares to
be traded by third parties. Since Spotify, itself, is raising no cash there
isn't a need for an underwriter nor an auction process. Each investor will
need to figure out listing, trading, clearing and settlement, _et cetera_
mostly on their own.

[1]
[https://en.wikipedia.org/wiki/Direct_public_offering](https://en.wikipedia.org/wiki/Direct_public_offering)

[2]
[http://scholarship.law.berkeley.edu/cgi/viewcontent.cgi?arti...](http://scholarship.law.berkeley.edu/cgi/viewcontent.cgi?article=1534&context=btlj)

~~~
acchow

      Partly as a result, they massively underpriced
    

Snapchat had underwriters and popped 50% on opening. Isn't that also massively
underpriced? Life insurance and health insurance companies don't make the
_obscene_ margins and figures that investment banks do. Investment banks
basically rob you silly when they underwrite. It's not insurance. It's clear
that you will be underpricing if you want your IPO to be underwritten.

~~~
easytiger
> Investment banks basically rob you silly when they underwrite

The cost of taking risks can be very high. There are not inconsiderable likely
downsides.

~~~
WhitneyLand
This is true and important to understand.

However the point is that after considering this and all other value add, it's
still vastly over priced, and is propagated by a happenstance of a few
unhealthy market dynamics.

Please, take a look at the link I posted above. Do you agree with how those
fees are applied?

------
alexkon
A noob question: Why don’t companies just bypass the underwriters and offer
their stock for sale using a Dutch auction, where the price starts very high
and gradually decreases until the most optimistic investors decide to buy?
That way, the company always sells at the highest price the market is ready to
offer.

~~~
DenisM
Dutch auction has notable downsides, namely _the free-rider problem_.

The way it's supposed to work is that a number of investors do due diligence,
decide on the price they think it's worth it to them, and make their bids.
Once enough pledges been made, the lowest price is given to all bidders.

However an investor may decide to join in without any effort put into due
diligence. Instead he will decide to bid high and rely on others to set the
fair price.

First, the "honest" investors end up paying for the free riders. Second, the
free-riders end up crowding in and bidding up the price above the reasonable
level. Consequently the "honest" investors put all the effort into it and end
up with nothing to buy at their determined price. In the end "honest"
investors end up not participating at all, so the Dutch auction thing just
fell apart.

In short, smart money was in charge setting correct price, but smart money was
crowded out by dumb money. This problem is not unique to Dutch auctions, but
it appears that that's where it is the most acute.

~~~
CobrastanJorji
Could you explain a bit more? I don't see how free riders are a problem.
Anyone who's willing to pay an arbitrarily high price in order to get in on
the stock should probably get some stock. If there are enough such actors,
they'd significantly raise the sale price, but that's the point, isn't it?

~~~
DenisM
Two problems:

1\. Suppose two funds compete, and the both partake in a Dutch auction. They
end up with having the same stock at the same price at the dutch auction, and
so the same income. However the free-rider gets fewer expenses so his profits
are higher. The diligent fund is losing to the free rider in profits. After a
while there are no more diligent funds.

2\. The diligent fund prices stock at "proper" value, the free-rider prices it
higher hoping to pay the lower, "proper" price but getting ahead of the
diligent fund in the queue. If there are many free-riders they all end up in
the queue before the diligent fund, so the latter may get less stock, or no
stock at all. After a couple of such experiences the diligent funds stop
partaking in any new Dutch auctions.

------
grabcocque
Spotify has lost 20% market share in 2 years, in the same time pushing their
annual losses to $200m.

Growing your losses whilst losing market share is not an _enormously_
attractive value proposition to investors.

~~~
Longhanks
Good. They have been so out of touch with what their users want, it's time
they wake up.

Examples:

\- Redesigning the client multiple times

\- moving from native clients to essentially a bundled browser

\- removal of lyrics feature

\- can only store 3333 songs offline on a device \- 10000 songs is the limit
for the library

\- Still no Hi-Fi option

\- Can't add third party songs to the cloud library

And the competition is definitly rising: For example, Apple Music offers
lyrics, a song limit of 100000, can store all of those songs offline, play
back on 10 different devices at the same time and store all those songs
offline. Also, you can drag and drop the songs that are unavailable into your
library, which makes them available on all of your devices.

Once Apple Music releases a web player (or a client for Linux), I'm done with
Spotify. For the moment, I need it for my desktop, which runs Linux.

~~~
zavulon
I realize that these features are what you want, and sorry that they're not
making you happy. But I would bet that a very small minority of users cares
about things native clients / bundled browser and Hi-Fi option.

On the other hand, they added things like making discovering new music much
easier, like "Daily Mixes" and "Discover Weekly", which - again, I don't have
any hard data to back this up - made a ton of users very happy.

~~~
iambateman
The first time I used daily mixes I was blown away by how perfect it was.

I use Spotify as much as conceivably possible (~20 hours per week) and haven't
heard a peep of discontent from anybody. Totally agree - Spotify is
incredible.

~~~
SomeCollegeBro
Yeah, I agree. The criticism above is definitely from an engineers
perspective. The vast majority of users really won't even notice most of the
items on that list. Reminds me of the episode of Silicon Valley where
engineers absolutely love their product, but everyone else hates it because of
the terrible UX.

~~~
fragmede
Three things stick out on that list as things non-engineers care about.

Lyrics; people listen to music and then enjoy singing along. This little thing
called karaoke supports a whole industry, for engineers and non-engineers
alike, so people can get together and sing songs.

Redesigning the client. New interfaces are scary and different for non-
engineers.

Can't add third party songs to cloud library. Non-engineers understand that
some licensing nonsense means they can't get Taylor Swift on their Spotify,
and then... just don't use Spotify, because all their music is on the Apple.

I'm not including "native client to bundled browser" as something non-
engineers care about, but people _do_ ask "why does the new version of
$program make my laptop fans get all loud?"

------
CodeSheikh
"They could also avoid the classic “leave money on the table” scenario, where
institutional investors and the other high net worth individuals who have
access to IPOs reap all the benefits from the first day’s gains."

Main justification of IPO IMHO is greedy banks, early investors, and
underwriters aiming to cash out a lot on the first day without giving a crap
about the company or its employees in general.

It is a welcoming step and a step in right direction. Cut the middle man out.

------
mac01021
I'm ignorant, but I'm sure many others here are too:

How does one become a publicly owned/traded enterprise without an initial
offering of one's shares to the public?

~~~
JumpCrisscross
There are two stages to most American IPOs: registration and the initial
public offering. Registration means your shares can be sold without relying on
a Securities Act exemption [1], _e.g._ the rule which lets one sell private
shares to accredited investors [2].

When you register, you have to start disclosing certain information, _e.g._
your financials, to the public. This is a hassle and expense most companies
delay for as long as possible. Companies must register before an IPO; this is
why registration and public offering are commonly conflated.

"IPO" specifically refers to the process by which an underwriting bank buys
shares from the company (including, potentially, current investors) at a
certain price and then sells those shares to the public at a different--
hopefully higher--price [3]. Some companies cut out the underwriters by
directly offering their shares to the public [4]; this is less common.

Spotify appears to be contemplating registering its shares but not issuing any
new ones to the public. I presume this is to stop the bleeding from their TPG
notes, which penalize them for not going public [5]. This would let existing
investors more easily sell their shares. It would not raise new money for
Spotify. Depending on the jurisdiction it chooses, reporting requirements may
be lighter than the United States'.

[1] [https://www.sec.gov/fast-
answers/answersregis33htm.html](https://www.sec.gov/fast-
answers/answersregis33htm.html)

[2] [https://www.sec.gov/fast-answers/answers-
rule506htm.html](https://www.sec.gov/fast-answers/answers-rule506htm.html)

[3]
[https://en.wikipedia.org/wiki/Initial_public_offering](https://en.wikipedia.org/wiki/Initial_public_offering)

[4]
[https://en.wikipedia.org/wiki/Direct_public_offering](https://en.wikipedia.org/wiki/Direct_public_offering)

[5]
[https://www.bloomberg.com/gadfly/articles/2017-02-08/spotify...](https://www.bloomberg.com/gadfly/articles/2017-02-08/spotify-
needs-a-little-help-from-its-friends)

~~~
rwmj
How would the price be decided for the very first sale of shares? And before
that sale, would there be a stock symbol with a "NULL" price? - I hope the
stock market tested that corner case :-)

~~~
twic
I don't know about shares, but for fixed income securities, it's common to
have a null price. I know this because my code is littered with checks for
them!

------
macca321
They should go mutual and offer shares to their customers.

------
meagher
The second part of this quote:

> “It seems short-sighted and very risky,” said Barrett Daniels, CEO and
> managing partner at Nextstep Advisory Services. “Don’t they want money?”

------
rainhacker
Curious why direct lending vs dutch auction like Google.

------
devoply
They reason they are not doing an IPO is because they can't. But I think this
is a great idea.

~~~
igor_filippov
Out of interest, why can't they?

------
fudged71
Why not a reverse takeover?

------
scarface74
The biggest problem with Spotify is that they aren't a company they are a
feature. Streaming music is being considered a low margin value add by
companies with much deeper pockets like Apple, Google, and Amazon.

None of Spotify's competitors are trying to make a company sustainable profit
from music streaming.

