After nine years as a start-up, Spotify announced plans Wednesday to go public.
As the most popular and celebrated music streaming platform, the company has its share of boosters. Still, as it prepares to join public markets, albeit in a somewhat unusual form, it faces the same problem other internet companies have faced before — a balance sheet that's deeply in the red, and a business model that doesn't show an obvious way to profitability.
Still, the company has some things going for it.
Right now, Spotify is the clear industry leader in the U.S. among streaming music services, with the company reporting 71 million paying subscribers as of December, and more than 159 million active listeners. Its closest competitor, Apple Music, is far behind at 36 million subscribers.
"They've got a strong subscriber acquisition funnel in the U.S.," MKM Partners managing director Rob Sanderson said. "They used to be the juggernaut, but still even with Apple having all the resources with the world to play with the space, [Apple hasn't] been able to bring it together and execute on that."
Like many public internet companies, including Snap and -- until last quarter -- Twitter, Spotify does not turn a profit. However its revenue is nothing to sneeze at. It had $4.9 billion in 2017, according to its F1 filing, with a growth rate of 46 percent compared to the prior year. Still, the company posted a loss of $1.5 billion last year (though roughly a billion of that was due to one-time costs).
Although the company has been able to negotiate better licensing deals with record labels, those are still very costly. Rights holders — labels, songwriters and publishers — get payouts that are tied to a portion of revenue, and as of December 2017 the company said it has paid out $9.76 billion in royalties to "artists, music labels and publishers."
If that seems like a lot, publishing companies and songwriters don't think so. They aren't pleased with the current payment split, saying basing royalties on revenue doesn't make sense. Many tech companies look at their music divisions as a way to boost revenue for their main business, and aren't concerned about turning a profit there, the publishers and songwriters argue.
In late January, U.S. copyright royalty judges — known as the Copyright Royalty Board (CRB) — sided in favor of publishers and songwriters and agreed to boost the rate for interactive streaming by more than 43 percent over the next five years.
Some have also taken issues with how Spotify licenses music. A $1.6 billion lawsuit from Wixen Music Publishing, for example, claims the company was using thousands of its songs illegally. The lawsuit is still pending in a California federal court.
There's also a concern about consumer overload. With so many streaming services, many analysts believe there's a limit to what consumers' budgets — and attentions — can handle.
According to an August 2017 Morning Consult poll, more than half of millennials surveyed said there are too many streaming services out there already. A recent online survey of more than 1,100 people by SyFy found more than six out of 10 subscribe to two or more streaming services.
"There is a limit to what people will spend as more subscription services emerge, whether they are video, audio or media like the New York Times or whatnot," said eMarketer senior analyst Paul Verna. "As more of them proliferate, they push up against limits people have on their budgets."
Consumers may be maxed out on TV replacements, but most still see movies, TV and music as different services, Verna said. (It's also worth noting that Amazon Prime offers all of these things, but analysts say consumers see Amazon as a shipping service first with other aspects secondary. In addition, the ad-free version of Amazon Music Unlimited is an additional $8 a month above Prime membership fees.)
Spotify is still very much in a growth phase. Since Wall Street responds favorably to Netflix's sustained subscriber growth, this could help Spotify once it's a public company.
In addition, the company could grow advertising revenue, especially since it has high engagement rates. The average American spent more than 32 hours a week listening to music last year, per Nielsen. And while it is a tiny percentage of overall digital advertising, digital audio advertising revenue reached $603 million in the first half of 2017 according to the Interactive Advertising Bureau and PwC, faster than 2016's total $1.1 billion haul.
Spotify also happens to be one of the top podcast providers, said former media executive Hernan Lopez — who founded immersive podcast company Wondery. Podcasts have a "stickier" model that could encourage people to tune back in and pay for a subscription, Lopez said. Podcast advertising revenue was projected to hit $220 million in 2017, according to the IAB.
Spotify's also began dabbling in sending artists on tour based on its data and algorithms, opening up yet another potential revenue stream. Last year, it created a nationwide tour for "Rap Caviar," its popular hip hop playlist with more than 8.7 million followers. The playlist has become a digital MTV for this generation in terms of how fans discover new artists and music.
Music rights are expensive, and since there are only a few major record labels, Spotify has limited negotiating power. If it doesn't cut a deal with them, it could lose up to a third of its library and the interest of its subscribers, eMarketer's Verna said.
The company notes this under "Risk Factors" in its IPO filing: "There is no guarantee that the licenses available to us now will continue to be available in the future at rates and on terms that are favorable or commercially reasonable or at all. The terms of these licenses, including the royalty rates that we are required to pay pursuant to them, may change as a result of changes in our bargaining power, changes in the industry, changes in the law, or for other reasons."
Music services have limited avenues to create original content, unless they sign bands or produce podcasts. (Spotify tried to launch original TV shows, but canceled them in October 2017 according to Bloomberg.)
Original content can also be used to draw in subscribers and convince customers why they need multiple services to get the right mix of shows and movies. But most streaming music services offer the same music — so there's no real reason to have more than one.
"The substitution ability [between services] in music is very, very high, whereas the streaming video solutions are becoming complementary," MKM's Sanderson said.
- Anita Balakrishnan contributed to this report
Note: CNBC and SyFy parent company NBCUniversal is an investor in Hulu.