Recent rumors abound that Spotify is seeking a massive round of venture capital funding – a round that would value the company at a reported $3.5B. Initial reactions seem to be, essentially, “Wow, that’s high.”
Indeed, $3.5B is a lot of money. But there are many persuasive arguments to the effect that Spotify is worth it, especially in view of its growth relative to other players in the digital music space, including and especially iTunes. Matt Rosoff of Silicon Valley Insider does a very nice job identifying the cases for a $3.5B Spotify.
I want to point out something else: that Spotify, at this point in its 6-year history, needs to lay claim to enough money to make good on its goals. Right now. Here’s why, as I see it.
Their goals are, as explicitly stated or implied by their actions, extremely ambitious. The company seeks to:
- Become the leading streaming service for global consumer music discovery and ad-supported consumption
- Become the leading paid subscription music service for consumers worldwide
- Become the “OS for music” via its app platform
That’s all. Then add the fact that these goals find the company swimming in the same waters as the following companies:
- Pandora. Market Capitalization: $1.73B.
Algorithm-driven “radio” feels a bit like a killer Spotify app these days. To view Spotify as worth double Pandora in the near-term doesn’t strike me as unreasonable at all.
- Amazon. Market Capitalization: $90.83B.
Amazon has one of the largest and most robust consumer media businesses in the world. Anything they do that is consumer-facing is potentially game-changing and Jeff Bezos is on record recently stating, “I’m a big fan of all-you-can-eat plans, because they’re simpler for customers.”
- Google. Market Capitalization: $209.71B.
Google Music might have underwhelmed, but Google’s YouTube platform is one of the fastest growing music revenue streams in the world. Google also “gets” mobile and the cloud. And, oh yeah, advertising.
- Microsoft. Market Capitalization: $272.62B.
Despite lackluster media and mobile forays, once someone says “operating system” I can’t help but think of all those smart, well-funded folks in Redmond, WA.
Hmm, there’s another one…right!
- Apple. Market Capitalization: $555.74B.
Worth nearly as much as the aforementioned companies combined, Apple gets hardware, mobile, and media. In fact, they get it big time. iCloud has been an initial disappointment but the verdict is still out.Rosoff indicates that if iTunes were viewed as an independent company, it might have a market cap of $8.9B. To view Spotify’s growth and ambitions as being worthy of a 1/3 iTunes valuation may be a bit bullish but, if they don’t shoot high, where would they shoot? Plus, Sean Parker is many things, including a smart guy who makes good technology bets. His opinion that Spotify will produce more label revenues than iTunes in two years’ time, though biased, should count for something.
- Cricket, Deezer, MOG, Rdio, and others…
Arguably any player in the digital music space is competing with Spotify for a share of consumer’s media wallets. This is especially true if they operate in the mobile or subscription spaces. None of these are yet behemoths but many have made serious strides of their own.
All together, it’s a tall order.
The fact is that while Spotify often seems like an 800-pound gorilla, in the context of their competition they can be viewed as relatively tiny and under-capitalized. I am of the opinion that the music industry wins when paying consumers win, and thus forego the casual piracy that has plagued the industry for years. In that context, Spotify’s existence as a growing, viable concern is necessary.
No one knows what Spotify will ultimately be worth and I think it is early to prognosticate. I can, though, see the value in, um, valuing Spotify’s vision highly enough to give them a shot at realizing it. Of course, this is all for the venture capitalists to decide. We’ll have to wait and see.