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Don’t Add a Spotify IPO to Your Playlist … Yet

Popular music streaming service could come public in fall


Spotify —  a popular streaming music service — appears to be gearing up for an initial public offering that could hit the markets in the fall. If reports are right, the company could start talking to investment banks as soon as next month, and a filing for the Spotify IPO might come during the summer.

spotify-ipoThere were other recent signs that a Spotify IPO was on the fast track. For example, the company snagged a $200 million line of credit from Morgan Stanley (MS), Deutsche Bank (DB) and Goldman Sachs (GS) — such a move generally comes about when an IPO is on the horizon. Also, Spotify has been looking to hire a specialist in federal securities filings!

Spotify is the brainchild of 20-something Daniel Ek, who started the company in 2006 in Stockholm, Sweden. The country turned out to be a great laboratory to experiment with the streaming music service.

However, a key to the success of Spotify was bringing on Sean Parker — an early adviser for Facebook (FB) — as a board member, as he proved instrumental in boosting user growth.

Also worth note: Unlike many other online operators — which rely on advertising revenues — Spotify landed upon the model of charging monthly subscription.

However, the Spotify IPO comes at a tough time in the business. The competitive environment was already intense, and it’s only getting thicker.

One of the newest entrants is Beats, the maker of headphones and earphones popularized by founder Dr. Dre. Beats hyped its newly launched service with a Super Bowl commercial and has teamed up with AT&T (T) for an aggressive promotional push. Moreover, it looks like Beats is talking to Twitter (TWTR) for some type of partnership as well. This could be a big deal since Twitter is extremely popular with music fans, as evidenced by the massive followings of artists such as Justin Bieber, Lady Gaga and Katy Perry.

Then there is Apple (AAPL). It’s iTunes Radio service, which was launched about six months ago, has about 8% of the U.S. market. This puts it at the No. 3 spot, behind Pandora (P) and iHeartRadio.

But Apple might have some other bombs to drop. The buzz is that the company is working an on-demand premium service similar to Spotify’s, and there might even be an app for Google’s (GOOG) Android.

Meanwhile, Amazon (AMZN) also appears to be working on a streaming music option for Prime subscribers.

Interestingly enough, the competitive pressures might already be nipping at Spotify’s heels. The company boasted 5 million paying customers back in 2012, but that number has only increased to 6 million — not an impressive growth ramp for a tech company coming public.

Given all this, there should be no surprise that Spotify appears to be rushing to get an IPO done.

But beware the rush — and beware the fact that Wall Street is starting to get wise to lackluster offerings. As seen with the horrible offering from King Digital Entertainment (KING) — the developer of Candy Crush Saga — at least a few people are investing with a discerning eye.

Bottom line: In light of the music world’s current trends and indications that the IPO market might be getting a touch more guarded, a Spotify IPO might not necessarily fetch a standout valuation.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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