The music streaming service, Spotify, has recently secured $1 billion in debt financing in order to compete with its competitors such as Apple, Tidal, and Google.
According to the Wall Street Journal, the initial report was later verified by Spotify, as stated by Techcrunch.
Spotify can increase its resources through debt financing without risking a potential decrease in its valuation, unlike equity. This decision is believed to be a protective measure against the growing competition from Apple Music, and it also enables Spotify to pursue strategic acquisitions, research, and marketing initiatives.
According to the Wall Street Journal, TPG, a private equity firm, Dragoneer Investment Group, and several clients from Goldman Sachs have provided the funding. TPG has also invested in Uber, which also secured over $1 billion in debt financing in 2015.
The financing arrangement for Spotify seems to impose several stringent requirements. The company will be obligated to pay yearly interest on the borrowed funds, beginning at 5 percent and rising by 1 percent every six months until it either becomes publicly traded or reaches 10 percent.
According to the WSJ, TPG and Dragoneer have the option to sell their shares within 90 days after an IPO, instead of the usual six months. This would result in a 20 percent discount for Spotify’s debt providers, which increases over time.
According to Wired UK, Spotify’s worth is estimated at $8.5 billion (£5.9 billion). However, despite this valuation, the company has consistently reported net losses. Specifically, in 2014, Spotify had an operating loss of £119 million and a net loss of £117 million. However, the company has not disclosed any financial information since then.
According to a report by FT in January, the streaming business is seeing tremendous growth with an estimated 75 million total users and 30 million paid users, despite facing financial losses. This surpasses the growth of Apple Music, which reached only 10 million users within 6 months, a milestone that took Spotify six years to reach.
Several companies are placing their bets on the potential growth of streaming music. This was evident as Soundcloud launched its own paid service on Tuesday, while the BBC has also made improvements to its license fee-funded Music app in recent months. Despite the differences in form, other formats such as vinyl records are proving to be resilient. In fact, in 2015, vinyl sales in the US generated more revenue at $416m (£289m) than the combined free versions of Spotify and YouTube.
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