Spotify raises $1 billion to compete with Apple Music
The music streaming arms race is heating up. Apple Music has picked up 11 million paid subscribers in its first nine months, and even SoundCloud, the former standard torchbearer of free access and content sharing, just unveiled its new paid subscription tier. Meanwhile, Spotify has taken some risky measures to ensure that it stays on top.
Yesterday, Spotify raised $1 billion in convertible debt from TPG and Dragoneer investment firms, as well as several clients of Goldman Sachs. This may seem like an odd choice for the company, given that they currently have 3 times more paid users than Apple, their closest competitor. But Apple Music has only been around for nine months, and though it has yet to demonstrably slow Spotify’s growth, Apple is enormously well-funded, and has the resources to wage a long campaign for subscribers.
Spotify claims that their new war chest will be spent on growth and marketing, with the hope of pulling subscribers from other services to Spotify, as well as increasing awareness of on-demand streaming and bringing in new customers. But the new funds could also be turned towards acquisition, of perpetually-in-financial-trouble SoundCloud, for instance, in order to limit competition to just them and Apple.
But these new investments come at a significant risk for Spotify and its employees. They will have to pay 5% interest on the debt, with that amount increasing one percent every sixth months until it reaches 10% or the company goes public. Dragoneer and TPG also get to convert debt into equity and a huge discount that will increase if Spotify doesn’t go public within a year. And even if Spotify goes public, the two firms can sell their shares 90 days earlier than other stockholders, including Spotify employees.
If Spotify has a great year against Apple, then these terms won’t heavily affect the company’s financials. If Spotify has a bad year, however, the harsh terms could ultimately cost the company and its employees a significant amount of money. Spotify clearly believes it will do well against Apple Music, and based on the last nine months, they have every reason to. But the tech world can be unpredictable, and Apple will certainly have a number of tricks up their sleeve. The battle for streaming supremacy will not be won overnight.
Via: Tech Crunch