Peter Kafka

Recent Posts by Peter Kafka

Where Did Spotify’s Billion Dollars Go? Ask Netflix.

Six months ago, Spotify was going to be worth $4 billion. Now it looks like a new funding round will value the streaming music company at $3 billion.

Where did that billion dollars go?

The most obvious answer is that all sorts of private market valuations for Web companies have come down in recent months. That’s because of the beatings that Facebook, Zynga and Groupon have taken since they’ve gone public.

Note the publication date on the New York Times’ report about Spotify’s supposed $4 billion round: May 17 — a day before Facebook’s troubled IPO.

But for Spotify, you can get a bit more specific if you want a reason to pass at $4 billion: Investors already know what a digital subscription business looks like at scale.

That would be Netflix, which has some 27 million subscribers at around $8 a month. Today, after Carl Icahn goosed it a bit, Netflix has a market cap of $4.3 billion.

Spotify says it has 4 million paying subscribers at around $10 a month. Bear in mind that if you value Spotify at $4 billion today, you’re really saying it will be worth three times that — $12 billion — in a few years, when it would presumably go public.

The two companies aren’t exactly analogous — Spotify, for instance, also has a nascent advertising business — but they sure look similar from a distance. They’re both international, they’re both dependent on rights deals for their content and they both face the perpetual threat of competition from the likes of Amazon, Apple, etc.

So even at $3 billion, Spotify backers will need to work hard to explain why their digital subscription business is worth so much more than Netflix when it comes time to IPO.

Of course, investors used to place a much higher value on Netflix, too. And the market has a short memory, so perhaps it will be an easier story to tell in a couple years. But right now it’s a tough sale.

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I think the NSA has a job to do and we need the NSA. But as (physicist) Robert Oppenheimer said, “When you see something that is technically sweet, you go ahead and do it and argue about what to do about it only after you’ve had your technical success. That is the way it was with the atomic bomb.”

— Phil Zimmerman, PGP inventor and Silent Circle co-founder, in an interview with Om Malik