Spotify, which appears to be putting the pieces in place for a possible initial public offering of its stock, on Thursday added a key component to its company by acquiring The Echo Nest, a data company and recommendation engine used by several of Spotify's competitors, as well as a host of music applications.
A report on TechCrunch today claimed Spotify paid $100 million for the Echo Nest, which raised $25.6 million in funding since its inception in 2005, according to CrunchBase. (Spotify declined to comment on the report.)
Daniel Ek, Spotify
The Swedish music company, which has already raised more than half a billion dollars over six publicly disclosed rounds since its founding in 2006, is also said to be seeking a credit facility with investment bank Goldman Sachs Group Inc. in a move that could pave the way for an IPO, according to a report on Friday from Bloomberg, citing two anonymous sources.
Should Spotify pull the trigger on an IPO now, it would not be the first technology company to do so without having a track record for profitability. Pandora, for example, posted a $1.8 million loss in 2009, the year preceding its IPO. Twitter posted a $64.6 million loss for the September 2013 quarter just prior to its November IPO. Spotify, in its most recent report, reported a $77.4 million loss for 2012, up from $58.8 million a year earlier. As Spotify continues to add users, its licensing costs, which is based on the number of music streams it delivers, go up.
While Spotify would not comment on its financial plans, its chief executive, Daniel Ek, spoke with Billboard on Thursday about the company's decision to buy The Echo Nest. Jim Lucchese, The Echo Nest's chief executive, joined Ek in the discussion.
Here's an edited version of the interview.
Billboard: Why is Spotify buying The Echo Nest when it could just as easily, if not more inexpensively, get the company's services as a customer?
Daniel Ek: What we really wanted to do was to give the Echo Nest the keys to Spotify's data so they can help us figure out which data matter and which don't. That's one reason. A second reason is their platform. With our [application programming interface], you have the ability to play music. With The Echo Nest API, you can now understand the music. That means you can build the ultimate running app, for example, using music that is tuned to your pace. Data will just be a massive advantage for us in this game.
Jim, how do you think your music streaming customers will react to the news that the Echo Nest is being acquired buy one of their competitors?
Jim Lucchese: There are a small handful of customers where there is a competitive concern on both sides. We're having discussions with them to address any of their concerns and telling them we are honoring all of our agreements. For the vast majority of our customers, however, combining the two companies will be a big game changer.
Give us some examples?
Ek: You can build a better running app for music because you understand the beat of the songs. You can also better understand the advertising opportunity if you have the data to give you the context for that app.
Lucchese: If you think about the places you go to read about music or share information about music with friends, you can augment that editorial with more personalized content and make the experience come alive with the actual music you're talking about. The idea of combining musical understanding and the music itself through Spotify will offer a ton more to a typical developer using our API today.
What happens to The Echo Nest team? Do you have a contract to remain with the combined comany?
Lucchese: The company will be a wholly owned subsidiary [of Spotify]. Everyone is staying. I've agreed to stick around for a long time. I'm not going anywhere.