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Last man streaming: Spotify's $250 million war chest makes it the music company to beat

Last man streaming: Spotify's $250 million war chest makes it the music company to beat

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With $250 million in new capital, the company is planning a big expansion — and its competitors should worry

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Spotify Connect (STOCK)
Spotify Connect (STOCK)

Among the many things that Spotify has excelled at since launching in 2010 is raising money — and this week, it reportedly raised an eye-popping $250 million more. Investors have now bet a cumulative half-billion dollars that the streaming-music company founded by Daniel Ek can dominate online audio, even at a time when deep-pocketed giants like Google and Apple have released streaming services of their own. With competitor Rdio laying off roughly one-quarter of its staff this week, Spotify appears poised to dominate the world of music on demand.

Spotify’s latest investor is Technology Crossover Ventures, an 18-year-old venture capital firm with offices in Palo Alto, New York, and London. Notably, TCV was a key investor in Netflix, another entertainment company that disrupted much larger rivals amid a shift from physical media to connected devices. Spotify and TCV declined to comment on reports of their $250 million deal. But late-stage investments in startups typically signify that a company is seeing significant growth in users and revenues, and Spotify can point to both.

Spotify has grown rapidly since March, sources say

The last time the company said anything about its user numbers was in March, when it announced 6 million paid subscribers and 24 million active users worldwide. Since then, those numbers have grown substantially, sources familiar with the matter told The Verge. Meanwhile, the company has almost doubled the number of markets in which its service is available, from 17 to 32 in just the last year. The new investment is expected to allow the company to continue expanding into new markets.

As its footprint has grown, so have expectations — the company is now valued at $4 billion. One reason: investors believe there is a high likelihood that Spotify would fetch a high price in an acquisition, in the event that the company does not feel comfortable going public. “If people are valuing Spotify at such a high rate, it’s likely that they think Spotify is the perfect accessory to a Microsoft or a Google — both of whom are investing in music services, but lag far behind Apple or even Amazon,” says James McQuivey, an analyst at Forrester Research.

Spotify sends 70 percent of revenues back to the labels

One reason many observers expect Spotify to eventually sell is that music is a difficult business in which to turn a profit. The company sends 70 percent of its revenues back to the people who own the rights to the songs. Meanwhile, competing services like Apple’s iTunes Radio and Google Play Music are widely assumed to be operating as loss leaders to entice people to spend money on other apps and media in the companies’ respective app stores. The more tech giants are willing to lose money on their own music offerings, the more Spotify could find its margins squeezed — and the more difficult it will find turning a profit.

That’s what the pessimists think, anyway. Spotify’s investors see a different picture — one in which loss-leader products inevitably are neglected, and the team that creates the best product wins. (Netflix has notably outlasted an endless parade of rival video services built by Blockbuster, Walmart, and others.) Most Americans still download their music, but at a declining rate. If the subscription access model becomes the dominant way of listening to music, Spotify will be positioned to reap the rewards — and potentially even stay independent.

The losers in this equation would appear to be other streaming-music companies, most of which have struggled to acquire even a fraction of Spotify’s users, revenues, or venture capital. The Rdio layoffs introduced more turmoil into a company that already this year has lost its vice president of engineering and vice president of product. The company’s CEO, Drew Larner, has also announced his departure, and will step down as soon as a replacement is hired. The service must now hope that a recent investment from terrestrial radio-broadcaster Cumulus helps it expand internationally. (Rdio did not respond to a request for comment.)

Other streaming music companies appear to be the losers here

Rhapsody also cut staff and replaced top executives this year as it fell behind. Pandora rose from startup to public company and has more than 200 million registered users, but the company has struggled to turn a profit, and it recently brought in a new CEO. The company posted a loss in its third-quarter earnings yesterday as new competition forced it to spend more on marketing, among other costs. By the time new services from Deezer and Beats arrive in the United States, it may be too late.

None of which is to say that Spotify’s road ahead is smooth. While the total investment in the company nearly doubled this round, its valuation only increased by about one third — suggesting that even its most bullish investors see a limit to its upside. At the end of the day the company is a middleman between record labels and music fans, and it remains at the mercy — and the whims — of both groups. But so is everyone else doing music on demand. The greatest gift that $250 million gives Spotify is time — time to grow, time to improve, and time to outlast its rivals. Nearly every number we have seen to date suggests it is well on its way.

Ben Popper contributed to this report.

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