Spotify's Uncertain Road Ahead: Legal Battles, Profit Pressures Loom As It Moves to Go Public
With an impending IPO finally on the horizon and copyright-infringement lawsuits worth over $1 billion stacking up, the streaming leader has plenty to deal with in the new year.
Spotify has established itself as the leader in on-demand audio, with 70 million paid subscribers worldwide. But the company now faces a series of hurdles as it barrels into 2018, with a long-awaited initial public offering on the horizon for the first quarter and several copyright-infringement lawsuits that could cost the company dearly -- and hang a dark cloud of uncertainty over its head.
Spotify’s IPO has been a topic of speculation since early 2014, but by filing paperwork in late December with the U.S. Securities and Exchange Commission, it will soon be a reality, which has significant ramifications for the music industry's financial health: A successful listing would mean more money for labels and investors, while a sputtering stock price could raise questions about the industry’s future.
On one hand, on-demand audio streaming now comprises the majority of overall music consumption (album sales + track equivalent albums + on-demand audio streaming equivalent albums) for the first time in history, capturing a 54 percent share in 2017, according to Nielsen Music. On the other hand, the major labels, which are all investors in the company, don’t want Spotify to become all-powerful and re-create the situation they found themselves in a decade ago, when Apple’s iTunes Store cornered the market on digital sales. While Spotify has many more serious competitors than Apple had then, it may be forced to become less dependent on the music business in order to turn a profit, potentially giving the labels less leverage moving forward.
“Three to five years from now, we won’t even be talking about Spotify as a streaming service,” says Mark Mulligan, managing director of MIDiA Research. “Instead, we’ll think of it as a multifaceted music platform. Spotify will be forced to diversify its revenue base [once] public, flicking the switch on new, higher-margin revenue streams such as e-commerce, data services for live companies and label services like artist development and promotion. Spotify has inserted itself into the space between artists and fans, and that terrifies the labels.”
Spotify’s IPO could be complicated by the copyright-infringement lawsuits it faces for streaming songs without licensing mechanical rights from publishers. The company was sued twice in July 2017, by Robert Gaudio, songwriter and founding member of Frankie Valli & The Four Seasons, and by Bluewater Music Services, which administers publishing rights for songwriters; and twice more in December, by British musician Thomas Dolby, and Wixen Music Publishing, which administers songs by Tom Petty, Neil Young and others. The suits all allege that Spotify streamed songs it had failed to license and ask for statutory damages, which can reach $150,000 per work for willful infringement. Spotify has always said that it couldn’t identify or find some songwriters and that it set aside money to pay them mechanical royalties. This doesn’t mean it wouldn’t be liable for infringement, although it could reduce jury damages if a case went to court.
Strategically, it may have made sense for Spotify to stream first and arrange the licensing details later; the company entered the U.S. on-demand streaming market ahead of Apple and Amazon, which gave it an advantage over its larger competitors. Before it goes public, however, it must reckon with the consequences. Although every streaming service has failed to license some songs, some songwriters and executives believe it never treated this problem with the seriousness it deserves. As recently as a year ago, Spotify would have had an easier time reaching settlements. Now that it has announced an IPO, it needs to negotiate fast in a situation where the other side has considerably more leverage.
Spotify has already tried to settle this issue in the past, first in a $30 million settlement with the National Music Publishers’ Association in March 2016 and then in a $43 million settlement in a putative class-action lawsuit last May. But the publishers in these latest suits opted out of those settlements, and the damages could add up. The Wixen suit asks for $1.6 billion, and all four lawsuits could potentially total over $2 billion in damages, although juries rarely assess anything close to that level.
Spotify’s immediate problem is that the uncertainty created by these cases represents a dark cloud over its IPO, which gives it an incentive to settle. The plaintiffs, on the other hand, are in no particular hurry, which gives them more leverage. “We are prepared to litigate this to the end,” says Richard Busch, a top copyright litigator representing Gaudio, Bluewater and Dolby.
Wixen has a less aggressive posture. “If [CEO] Daniel Ek were willing to call me and talk about this, we could work it out in 10 minutes,” says CEO Randall Wixen, adding that he’s hopeful a resolution can be reached. In addition to some compensation for past infringement, Wixen wants to secure better licensing terms going forward than the ones available in the class-action settlement.
But these cases could only be the beginning. If the judge rejects the company’s class-action settlement, it could face more lawsuits -- and settling these cases could encourage more plaintiffs to come forward. If this does happen, the potential legal bill could represent an existential issue. In a court hearing on the settlement, a Spotify lawyer estimated that the company infringed 300,000 songs, and the actual number could be several times that. Even settling each case of infringement for $1,000 -- at the low end of statutory damages -- would cost $300 million. And although this is unlikely, it could cost even more.
Amazon, Google, Apple and Facebook are all increasingly-legitimate competitors with whom Spotify will have to spar. As Amazon Music expands internationally, it may have the power to gobble up older consumers; Facebook just signed a landmark licensing deal with Universal Music Group, and is nearing deals with the other majors; Apple Music continues to gain subscribers and sign up exclusive content deals; and YouTube plans to launch a new subscription service in 2018.
With rumors of its public listing swirling, private trades in shares reportedly valued Spotify at $16 billion last September; assuming continued growth rates, the company could be worth over $20 billion when it goes public, deeming it one of the largest consumer-tech IPOs in recent years.
Yet the lawsuits are bringing uncertainty back into an equation the settlements were supposed to remove. And that type of instability, perceived or not, could hamper its standing among potential investors, despite its established position as the market leader in a dynamic sector. “Wall Street does not like mature tech companies,” says Mulligan. “Grow fast, or watch your stock price fall fast.”