News that Spotify raised money at a $3 billion valuation and generated $200 million in revenue in the first half of 2012 is more like the sound of air being let out of a tire rather than a bursting bubble. The company has been hyped more than any other in the subscription-music space -- deservedly so -- and expectations needed to brought back to reality.
Spotify recently raised $100 million at a $3 billion valuation, or $1 billion less than the valuation it was aiming for when raising funds in recent months, according to reports. As Billboard.biz reported Sunday,  the company raised the funding from several investors, including Goldman Sachs.
Another sign of normalcy is a report at TechCrunch  that Spotify's revenue in the first-half of 2012 was $200 million. That puts the company on track to raise somewhere around $500 million to $520 million, far short of the roughly $900 million target CEO Daniel Ek mentioned  in an interview with Swedish business daily Dagens Industri in April.
A $3 billion valuation is proof that expectations have been appropriately reconsidered. A $4 billion valuation would have put Spotify, a company that has yet to turn a profit with its advertising- and subscription-supported business model, just $300 million short of the current value of post-IPO Netflix, a company whose profitable DVD years are behind it but turns a profit and had 25.1 million paying subscribers at the end of the third quarter. And $4 billion is just $100 million shy of the $4.1 billion combined price tag of EMI Music.
Its current valuation appears to be much higher, on a per-subscription basis, than that of its main competitor, Deezer. Reports of Deezer's $130 million in funding from Access Industries and other investors did not include the company's valuation. However, a February 23 report at French newspaper Les Echos  said Deezer was raising between 50 and 100 million Euros at a 500-million Euro ($665 million) valuation. Deezer has about 2 million subscribers worldwide, or roughly half of Spotify's subscriber count in July. A $665 million valuation would value Deezer at $333 million per million subscribers. A $3 billion valuation would value Spotify at $750 million per million subscribers, or more than twice the value per subscriber of Deezer.
Even though it's valued "only" at $3 billion, Spotify has a lot going for it. On-demand music is an exclusive club with relatively high barriers to entry. Spotify need only worry about a few competitors such as Deezer and, because of their deep pockets more than their products, Microsoft and Sony. Spotify may not have a long-term competitive advantage, but investors need only worry about the next three to five years. In addition, Spotify has an excellent product and continuously innovates. Competitors will arise but will usually lack those two important characteristics.