Saturday, April 11, 2015

subscription based music service taking over Yuan (Danny) Xu

The music industry is going through some of the most significant changes in retailing models in recent years. Ever since the start of internet era, we have seen challenges of piracy, P2P circulation that the music industry has been combat for years. However, this transformation of the revenue model might have just crushed the traditional record selling retailing model. 

The market seems to be very optimistic about Spotify's future. According to WSJ:

Analysts at Manhattan Ventures Partners forecast Spotify had 2014 revenue of $1.3 billion, meaning the company is being valued at about 6.5 times its revenue. That is higher than Pandora, which is trading at about 3.9 times its 2014 revenue of $920.8 million.

Spotify is also valued at roughly the same amount that SoftBank Corp. offered to pay Vivendi SA to acquire Universal Music Group in 2013. Vivendi rejected that $8.5 billion deal. EMI Group—the smallest of the four global music companies—was split into two and sold collectively for $4.1 billion in 2012.

Spotify was valued at more than $5 billion last September, according to filings by GSV Capital Corp., a private investment fund that owns the shares.

Spotify is raising another $400 Million which put their evaluation at $8.4 Billion now. According to WSJ:

The deal would place Spotify in the upper ranks of the world’s most highly valued private tech companies. Goldman Sachs Group Inc. and an Abu Dhabi sovereign-wealth fund have agreed to invest in the round, and Spotify has held talks with a range of asset managers and venture-capital firms around the globe, the people said.

The terms have been set and the funding round is expected to close in the coming weeks, one of the people said. Nine-year-old Spotify, which previously raised more than $500 million in equity funding, hasn’t established any timeline for a possible IPO.

This evaluation again probes people to think about the changing business landscape in the music industry. The idea has been floating around that the millennials in general have a stronger preference for shared economy compared to owned economy. For example, for city residents, Zipcar has become a popular choice due to its simplicity and no hassle for parking, car registering, insurance, etc. Music industry, similarly, has moved along that trajectory in response to the demand of the young customer groups. With lowered prices for data usage and internet access, streaming has become feasible without much cost. This accommodates people's need to constantly trying out new music which, preferably, are similar to their existing stock. However, this new business model are impacting the traditional record sales significantly. The possibility to access millions of songs instead of buying all of them educates consumers today to give up their purchase intentions, therefore reduce the overall revenue stream for record companies. It provides both challenges and opportunities for these big name traditional entertainment companies to rethink their business strategy, maybe it is still not too late to join the crowd? 

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