Spotify’s success “shows that the market is becoming more mature: it is going to be segmented, which will widen the scope for specialised players with a strong personality,” Denis Thébaud, CEO of Qobuz's parent company Xandrie, told Music Week. “The music market has always developed by diversifying, and the listing of the best online platforms is a sign of good health.”
Internationally, entertainment also seems to be the driving force behind several upcoming tech IPOs, especially in China. Tencent Music -- which is currently valued at over $12 billion after striking a mutual equity-investment deal with Spotify last December -- is widely expected to spin off shortly from its parent company into an IPO in Hong Kong. Netflix- and YouTube-style video services Bilibili and iQiyi are reportedly in the process of raising up to $525 million and $2.4 billion, respectively, for a public listing in the U.S.
On one hand, Thébaud’s claim that market maturation favors segmentation and specialization is somewhat true for music. The recent growth of accelerators like Techstars Music -- whose inaugural cohort of 11 startups raised over $20 million in venture capital funding within the last year -- is a testament to how music tech's potential is widening far beyond streaming alone, with VCs and rights holders alike leaning in.
“Our entire investment thesis is motivated by our belief that there’s an upside for subscription streaming, which will ignite a lot of reinvention around all the other product categories in music,” Bob Moczydlowsky, managing director at Techstars Music, tells Billboard. “It’ll change how we sell tickets, how we interact with artists, how we track royalties and how we create, distribute and converse about music. There’s still a lot you can do for the music business holistically, and a lot of companies will try to ride that wave in the near future.”
The rise of Asian entertainment-tech IPOs also alludes to the accelerating adoption of mobile computing and unlimited data plans globally, which analysts frequently cite as one of the key factors driving music streaming’s continued growth in emerging markets. According to Spotify’s SEC filing, territories outside of Europe, North America and Latin America have seen the fastest monthly-active-user growth for the service, at 51 percent year-over-year (compared to runner-up Latin America, which grew by 31 percent year-over-year).
“There’s no version of this story where fewer people get internet access in the future, or where fewer people love music and want to create and interact with it five to ten years from now,” says Moczydlowsky. “In every category, the answer is more. Whether we as a tech community can build the right services that meet that growing demand is an open question, but it’s really meaningful for us to be able to surf that wave.”
Yet, IPOs are evidently not for everyone, as many tech startups beyond music -- including but not limited to Snap and Blue Apron -- have learned the hard way.
Whenever a market leader in a certain product category IPOs, it's normal for similar companies in the same category to rush toward their own public offerings, over a period of up to 24 months. “Usually the highest-quality deals lead the way, and the quality decays as more rush through the window,” Duncan Davidson, general partner at Bullpen Capital, tells Billboard.
This decaying trend in quality may be a red flag for Sonos, Qobuz and other music tech companies mulling a future life on Wall Street. “Sonos is in trouble -- this seems like a last-ditch effort to get capital,” says Davidson. “But given the time it takes to get ready for an offering, I wouldn’t expect them out until late in the window.”
Indeed, even if it is profitable, Sonos faces more of a challenge than a convincing growth story -- and any tech company would be wise to use an IPO to capitalize on a stage of hyper-growth, not stagnation.
Upon stepping down from his position as CEO, Spence’s predecessor John McFarlane admitted that he had allowed Amazon to beat his company to the punch when it came to making voice-activated speakers. Since then, both Google and Apple have also released their own smart speakers, further jeopardizing Sonos’ chances of making a meaningful dent in the voice market.
Sources tell Billboard that Qobuz itself has also been struggling financially even after Thébaud and Xandrie bought the company, and just hired new CEO Yann Miossec (former evp and COO of Warner Music France) to help further internal restructuring efforts.
Interestingly, Thébaud told BBC News back in Aug. 2017 that he would be satisfied if the company acquired just one million users worldwide. “Qobuz is not a brand for everyone,” he said. “It's not a brand where we want to have 100 million users. Our goal is really to satisfy the most discerning music lovers, the ones who are the most passionate about music.” That growth story doesn't exactly sound enticing by Wall Street standards.
Sonos and Qobuz would not be the first music companies to pursue an IPO out of desperation for cash. Australian music streaming service Guvera tried and failed to IPO in Jun. 2016, and quietly shut down less than one year later. An ongoing public examination of Guvera’s collapse has revealed that bankers at JP Morgan had advised the service against rushing to go public, but then-CEO Darren Herft “simply couldn’t wait any longer to IPO, having failed to bring in significant extra finance the previous year.”
French streaming service Deezer also backed out of its own plans to list on Euronext in 2015, opting instead for a private Series E funding round worth around $100 million. Deezer cited “market conditions” as reasons for canceling its plans to go public; in reality, the service was facing a more urgent, company-specific problem of relying too heavily on telcos for user acquisition, leading to an unfavorable proportion of inactive subscribers who did not actually generate any revenue for the company.
These events are a sobering reminder that IPOs, which are fundraising events at their core, don’t always communicate internal confidence in a company's financial performance. In fact, at their worst, they do the exact opposite.
“At least in the American startup scene, IPOs are seen as a sort of ‘brass ring’ of success,” says Moczydlowsky. “On a macro level, they often do lead to growth and success for a wider product category, as institutional investors put their money more formally behind it. But you still need to make individual judgments about individual companies, and IPOs are never as strong of a bellwether for everything across the board as people tend to make them out to be. As for Spotify, they're a mature business that has been around for more than a decade, and they need to capitalize themselves in order to keep growing apace and to protect themselves for yet another decade. They haven't solved everything, and still drastically need to improve their margins."
All this being said, the music landscape has evolved substantially over the past few years. When Deezer first announced its IPO, the company was aiming to raise at least $344 million from public investors, valuing the service at up to $1.25 billion. Onlookers claimed that such a high valuation “may be large for a company in the cutthroat, low-margin business of music streaming.”
Fast-forward 30 months later, when Spotify ended its first day of trading on the NYSE with a market value of more than $25 billion -- 20 times the upper bound of Deezer's valuation. This is a clear sign that both Silicon Valley and Wall Street are gradually warming up to the notion that streaming services are not only here to stay, but also encouraging an expansive ecosystem of founders to build more sophisticated tech solutions for music. Some veterans from the VC and traditional finance worlds are even switching industries entirely, taking on senior management positions at major music companies like Kobalt and Downtown Music Publishing.
This increasingly bullish outlook on the music industry is also helping certain music tech companies that are already public, but have struggled to convince investors of their vision. For instance, while Pandora's shares have declined by more than 55 percent over the last year, analysts look to the rise of voice as a potential rebounding opportunity for the company. “A platform shift is underway with smart speakers,” Justin Patterson, analyst at Raymond James, wrote last month. “This creates the need for audio-based ad formats, which Pandora is uniquely positioned for.”
“Is music as vibrant and frothy right now as other product categories? Not yet,” says Moczydlowsky. “But is it headed in the right direction? Absolutely.”