WHAT: Digital music service Spotify is in talks with Silicon Valley-based venture capital firm Technology Crossover Ventures to raise up to $200 million in a late-stage round, according to people familiar with the matter. The early funding discussions could see the London-based company valued at more than $5 billion, one source says. The 5-year-old company says it has more than 6 million paying subscribers worldwide.
WHY: Spotify has focused on winning subscribers over by offering the best consumer experience it can from a technological perspective with a “freemium” model that includes free access to music with the hope that consumers will sign up to pay for an even better experience. The strategy has been reasonably successful if you look at Spotify’s announced user numbers. It has 6 million paying subscribers and another 18 million active users on the freemium service, which includes advertising and does not allow users to listen to on-demand songs on their mobile devices. The challenge, though, is all that music costs a lot of money — Spotify has paid out more than $500 million to rights holders since its inception and is on course to pay another $500 million in 2013 alone. The other reason Spotify requires more funding is that its model relies on scale, so the need to expand globally and rapidly is key to its ultimate success. It is now in 32 countries across Europe and North America. (Spokespeople for both Spotify and Technology Crossover Ventures declined to comment.)
WHO: Spotify was founded by CEO Daniel Ek and Martin Lorentzon in Stockholm and quickly moved its head office to London. It is considered the leading digital music subscription service, but even with 24 million active users spread out all over the world, it is still seen as needing to go mainstream with mass-market consumers. Technology Crossover Ventures is best known for its technology investments in Facebook, Groupon and GoDaddy. It also has stakes in Netflix and Electronic Arts, where it can gain insight into content distribution economics online.
IF: It seems as if a story about new Spotify funding pops up at least every six months. One reason is it’s the market leader in a closely watched sector. But as funding both in equity and debt mount — more than $400 million at Billboard’s last check — it begs the question, How do these later-stage investors expect to make a return? The answer increasingly appears to be an initial public offering, as there are now very few companies that could comfortably splash out more than $5 billion to buy a digital company in a still somewhat contentious and unproven market. The IPO path is one that will be particularly intriguing to watch given the volatility of Internet stocks even at the best of times. An Internet stock focused on music could give some investors the jitters.