Spotify, the cool European music streaming startup, has a great product, a great business, and a big problem.It has a great product because you can download the app and stream any music on any computer, and it has a great business because its freemium offering is getting people to pay for that streaming, to the tune of a projected $100 million this year.
But it has one big problem: it hasn’t been able to launch its service in the US. The launch has been pushed back again and again. Music labels are still, after all these years, wary of internet music startups. Spotify got around this in Europe by striking individual deals with big label affiliates in each European country, but it can’t do that in the US.
Music labels see themselves as stuck between a rock and a hard place. On one hand, they don’t like Apple’s dominance of the online music industry. On the other hand, they don’t want to hand that control over to some startup. And talks of them making equity investments in Spotify has come to naught — the labels have been burned by this in the past, and we suspect Spotify’s not too hot about that idea either.
Only one thing will placate content owners enough to give Spotify US streaming rights: a big, fat, upfront payment. But the cash-strapped startup, despite its high revenues, is still losing money because it’s already paying a lot of money in licensing rights. Spotify needs to operate at scale before it can be profitable. Private equity investors are leery of music startups, with good reason, and raising enough money privately to make those big payments is probably prohibitive.
So, what can they do? Well, they should go public.
Spotify is based in London, and requirements for IPOs are much more relaxed in Europe than they are in the US — no Sarbanes Oxley here. Spotify isn’t profitable, but its business model is working. It just needs cash, scale and a bit of time. Meanwhile, investors are hungry for tech stocks, pushing the valuations of the companies who do go public into the stratosphere.
Unlike Fred Wilson, we don’t believe only big, category-leading companies should go public. We believe as long as investors know what they’re getting into, the public should be able to invest in companies like Spotify that have a great idea and business model, but need a big slug of cash.
We think Spotify could go public in Europe and could get a higher valuation in the public markets and raise enough money to buy its way into the US market. We believe an IPO would have another benefit: the public would see just how much money they’re forced to pay to the labels, and they might be moved to agitate for the labels to lower their ambitions a little bit, at least until Spotify hits profits, which is in their long term interests after all.
Unless a big private investors is willing to pony up enough money at a high enough valuation, this is the best way forward we see for Spotify.
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