Spotify is 12 years old, and has never been profitable.
Last year it posted an operating loss of $461 million.
Today, as it goes public, it wants investors to value it at something above $20 billion.
In order to believe that's a good idea, you have to believe that Spotify has figured out a way to improve its margins, which it says it will do.
And in order to believe that, you have to believe that Spotify has figured out how to change the way it works with its most crucial partners: The big music labels.
Spotify hasn't said it will do that, for good reason. Spotify and the big music labels are in a co-dependent relationship that is both fraught and fruitful.
The big labels provide Spotify with the music that makes up 87 percent of the company's streams. Spotify provides the labels with billions in revenue, which is starting to replace the vanishing money the labels used to make from CD sales and digital downloads.*
But Spotify's plans for the future do involve changing that relationship in the long run.
The idea, according to people familiar with the company's plans, isn't to cut out the big music labels, or compete directly with them by signing acts to recording deals.
Spotify does imagine, however, that over time, a growing tier of music acts, or small independent labels, won't use the big labels for distribution. Instead they'll work directly with the streaming service.
If that happens, the thinking goes, Spotify will be able to command better terms from the small acts and labels than it gets from Universal Music and the other giant labels. But the small acts and labels will end up keeping more money than they would have in the earlier arrangements, because they won't have to pay the big guys to bring their stuff to Spotify and other outlets.
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Spotify's gross margins have already been ticking up — to 21 percent at the end of last year — in part because of new deals it has struck with the big labels.
But Spotify CFO Barry McCarthy has been clear about the fact that Spotify can't expect to keep striking new deals with the big guys to get Spotify to its goal of 35 percent margins. He and the rest of the company have been less explicit about what will get them to that number.— a term it used dozens of times in its public offering documents, and then again during its investor pitch day last month — it is talking about a bunch of different things. But the main one is that Spotify wants to connect music acts directly with music listeners, and take a cut of the transaction.
"It's a kind of code," says a person who has worked with the company since its early days. "You have to imagine what they're talking about."
This model could theoretically apply to giant stars as well as small acts. Note that Metallica, which used to complain about music streaming, changed its tune once it got control of its own music and signed a direct deal with Spotify in 2012.
But the company doesn't plan on trying to convince giant stars like Taylor Swift or Drake that they should abandon their labels and work directly with Spotify (though it's worth keeping an eye on Swift, who will have many intriguing options in front of her in the near future).
Instead, the company is thinking about a "mid-tail" of acts — big enough to have fans, but small enough that big labels won't spend a lot of time pursuing them. If you're making a list of worldwide musicians, think about acts number 1,000 to 10,000, suggests a source.
If you float this idea with the big music labels, you'll get a couple responses, which aren't mutually exclusive:
Today's IPO doesn't formally change anything between Spotify, the labels and the music acts Spotify wants to work with directly. If Spotify's plans work out, they will do so over time.
But now that Spotify is a public company, investors will be able to watch its progress closely. The music business will be watching, too.
*The labels also own meaningful equity stakes in Spotify. Sony Music, for instance, may have more than a billion dollars worth of Spotify shares at the end of today's direct listing.