Why Is Spotify’s Valuation More than Double Pandora’s?
Spotify Nears $400 Million Funding at Valuation of $8.4 Billion (Part 2 of 2)
Spotify has higher net losses than Pandora
In the previous part of this series, we looked at Spotify’s anticipated $400 million funding and its $8.4 billion valuation. This is more than twice as much as Pandora’s (P) market valuation of $3.5 billion. In terms of net losses made by music-streaming companies, Spotify has higher net losses than Pandora.
As the chart below shows, Pandora made a $30 million net loss in 2013 compared to a net loss of $79.6 million by Spotify.
Comparatively, Shazam had a small loss of $3.3 million and managed to earn a valuation of $1 billion. Shazam is a UK-based music discovery company and a popular mobile application that works on Apple (AAPL) iOS, Google (GOOG)(GOOGL) Android, and Microsoft (MSFT) Windows Phone platforms.
The main reason for the losses in this industry is the high level of royalty fees these companies must pay music labels in order to access songs. This is where Apple wants to step in and streamline the music-streaming market. Apple is negotiating with music labels to lower prices in an effort to pass on savings to its music-streaming service users. A lower pricing structure would attract more subscribers, which would make its music-streaming business a success.
Investors like Spotify’s business model
Despite netting higher losses and having a smaller market share than Pandora in the Internet radio space, Spotify could fetch higher valuation because of its different business model. While Pandora generated about 72% of its revenues from advertising and the rest from music subscription as of Q1 2014, Spotify earns the bulk of its revenues from subscriptions and only a little bit from advertising.
According to Spotify, in January 2015, it had about 45 million free users and 15 million users who pay $9.99 per month for advertisement-free music subscriptions. Investors like the subscription model more than the advertising model since it gives them some sort of visibility to a company’s future revenues and profits. This is possibly the main reason for a higher Spotify valuation.
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