In digital media there are winners and losers and often little in between. By all appearances, Spotify is seeking to further its winning position and stave off whatever competitive threats it may face.
The billion-dollar convertible debt funding Spotify announced Tuesday (Mar. 29) offers the company the ability to pounce on an opportunity to propel the company forward. With Apple Music nipping at its heels, Spotify is not content to simply raise subscription numbers every six months. “The entire reason to raise is for strategic reasons,” a source familiar with the situation tells Billboard. “You raise money when you can, not when you need it.”
The leaders of the $1 billion funding round were private equity firm TPG and the Dragoneer Investment Group, a hedge fund. The investment strategies of these types of firms are far safer than the speculative bets on small and growing companies placed by seed, angel and venture capital investors. Early investors have more losses than wins. Later investors are more wont to seek a guaranteed rate of return. Convertible debt does just that. The amount will either be repaid (debt holders have priority over equity holders when a company goes bankrupt) or converted to equity and sold at a gain during an initial public stock offering, for example. (Although there has been speculation for years, Spotify has not publicly stated an ambition to go public.) There’s some downside, but not much.
Of course, the size of the funding raises questions about the possible uses for it. A billion dollars seems too much money for a series of small, additive acquisitions that would result in incremental improvements. A large chunk of convertible debt is perfect for a bigger prize. But what?
It’s easier to first think of what Spotify doesn’t need to acquire. Competitors like Pandora, SoundCloud, Tidal and Deezer would give Spotify more subscribers — that it might eventually get anyway. That would also bring the headache of integrating two known brands. Following Apple and Deezer’s lead with the purchase of a podcasting startup would be a small, additive pickup that doesn’t require another large funding round. A video content creator would make sense if video was more a focus than a feature for Spotify.
There are some companies Spotify could theoretically acquire, but probably wouldn’t. A large digital music company acquiring a record label has been bandied about for years. A decade ago, more than a few people thought Apple should have bought a major label. A billion dollars wouldn’t get Spotify a major label but would be enough for a large independent label. The same goes for a music publisher. Both scenarios work in theory. And there are notable precedents: cable/broadband supplier Comcast owns media company NBCUniversal. Time Warner Cable used to be part of media giant Time Warner.
Thus far, Spotify’s acquisitions to date have been additive. The Echo Nest provided data and intelligence to improve recommendations and playlist-building radio service; its acquisition of Tunigo fit into Spotify’s strategy around music discovery; last year’s pick up of Seed Scientific helps Spotify better turn its data into insights; this year’s deal for Cord Project and Soundwave was likely an effort to acquire talented teams into Spotify’s product team. These pickups made a better service. They didn’t immediately boost revenues.
In fact, most acquisitions in digital music are additive. Two deals for podcast startups, Apple buying Swell and Deezer buying Stitcher, facilitate the addition of podcasts to music-first services.
But some examples of complementary acquisitions can be found. Apple’s purchase of Beats Electronics gave Apple both Beats Music, the precursor to the Apple Music subscription service, and Beats Br Dr. Dre, the headphone and speaker brand that complements digital music and the hardware — iPhones, iPads, Mac computers — that play music. Pandora’s acquisition of Ticketfly was a sort of hybrid acquisition. Ticketfly operates as a standalone company that immediately boosts Pandora’s revenue. Pandora is hoping the addition of a ticketing element will also create a better listening experience.
Then there are businesses that complement Spotify’s music streaming service. Both a ticketing service and a merchandise company would check three boxes: add a new revenue stream, enhance the user experience, and immediately provide a new revenue stream. A digital audio company that makes in-home systems and portable speakers would complement the company, and provide some revenue generation.
The safest bet is Spotify will aim high and stay smart. Sitting on the billion is better than taking a big risk in pursuit of revenue growth.