The MBW Review offers our take on some of the music biz’s biggest recent goings-on. This time, we uncover some very tasty documentation regarding Spotify‘s past – and mull over what it means for the service’s present. The MBW Review is supported by Instrumental.
Back in summer 2009, rumblings began to indicate that the major labels and Merlin had been granted equity stakes in the hot new Swedish startup, Spotify.
Initial reports out of Scandinavia suggested that the biggest of those stakes was taken by Sony BMG, on 5.8%, with Universal on 4.8% and Warner on 3.8%.
This was followed up by TechCrunch, which said it had gained access to ‘unverified capitalization table information’ and could largely back up these figures.
This, however, came with a slightly unsure qualification: TechCrunch said it believed these numbers were either “largely or completely accurate”.
Today, MBW can finally put any doubts to rest: the numbers were wrong.
Slightly.
We’ve just spent a day digging around on Luxembourg’s equivalent of Companies House – where Spotify remains established as a commercial entity. And we found a rather revelatory document amongst the deluge.
It was originally published in December 2008, you can download the relevant part here, and it clearly shows three important things:
- (i) The major labels plus Merlin were given a total of 352,176 shares in Spotify in 2008 for an (amazingly cheap) nominal sum of €8,804.40;
- (ii) Spotify’s total share count at the time, after the issuance of the music companies’ shares, was 1,956,531;
- (iii) The relevant parties – Sony BMG, Universal, Warner, EMI and Merlin – were each given a round number % slice of Spotify’s 1,956,531 shares. In total, the group received an 18% equity holding in Daniel Ek‘s firm.
As you can see above, Sony BMG received the biggest chunk of these shares, getting hold of 117,392 – which amounted to 6% of Spotify’s entire company in 2008.
Next up was Universal, with 97,827 (5%).
UMG, of course, eventually acquired EMI Records Ltd, and therefore swallowed its 2% share – giving Universal a 7% total stake in Spotify, retrospectively speaking, in 2008.
Warner got given 78,261 shares – worth 4% of the Spotify business in 2008 – and Merlin took home 19,565, worth exactly 1%.
The repeated use of ‘in 2008’ above is important here because these shares later got heavily diluted by additional investors in Spotify, which we’ll come to in a moment.
All of this information is particularly timely today (May 14). because of the news that Merlin – the global indie label agency – has cashed in its entire shareholding in Spotify for an undisclosed sum.
It’s done so little over a month after Spotify – with a current market cap in excess of $28.5bn – floated on the New York Stock Exchange on April 3.
The Merlin news also comes two weeks after we learned that Sony banked 50% of its shares in Spotify for around $750m, and seven days after we reported that Warner had banked 75% of its shares for approximately $400m.
The obvious question, then: can we work out from the above stats how much money Merlin just took out of Spotify by selling its shares?
The short answer is no.
The longer answer is, yes, probably.
But we’re going to have to crunch a few more numbers first.
Let’s, for a moment, further examine Warner Music Group‘s sale of its stake in Spotify.
WMG officially announced last Monday (May 7), that it had sold “about 75% of our Spotify equity for approximately $400m”.
This sale either took place, according to Warner, in April or in the first few days of May (ie. after calendar Q1).
What we know: the highest day-close Spotify share price during this period was $170 (Weds, May 2), and the lowest day-close Spotify share price was $143.99 (Thurs, April 5).
Considering Warner banked approximately $400m, this means, at the stock price’s highest point, Warner would have owned around 2,352,941 Spotify shares pre-sale ($400m / $170).
And, at the stock price’s lowest point, Warner would have owned around 2,777,971 Spotify shares pre-sale ($400m / $143.99) .
Stay the course – we’re nearly at the important bit.
Remember that these figures only represent approximately 75% of Warner’s total holding (it still owns 25% of its original Spotify stake).
If we do the requisite calculation to estimate what 100% of WMG’s pre-sale Spotify stock volume looked like, we end up somewhere between 3.14m and 3.70m shares.
According to Spotify’s filings, there were 178,112,840 total ordinary shares available in its company when it went public on April 3 – which is how it came up with the below table (putting Sony’s ownership at 5.7%).
Long story long: according to our calculations, this all means Warner had a Spotify shareholding of between 1.76% and 2.08% before it sold $400m-worth of stock in the past few weeks.
That’s an approximate equity stake of 1.9%.
Notice anything odd about that number?
Back in 2008, remember, Warner had a crisp 4% ownership stake in Spotify.
Yet over the years, with investment pouring into the platform, diluting the holdings of existing stakeholders, that number pretty much got halved.
And it’s here we can start making a reasonable estimate of what Merlin’s original stake in Spotify looked like by 2018 – and what it was worth in cash money.
First, the pre-warning: the following assumes that all of Merlin’s original equity remained amongst those 178,112,840 ordinary Spotify shares. (It also ignores the unlikely possibility of additional equity which may have been purchased.)
Now, if Merlin had a 1% stake in Spotify in 2008 – and saw its holdings reduced by a similar dilution process as Warner over the past decade – it would have ended up owning around 0.5% of total shares in Spotify when it cashed in.
That would have amounted to a volume of around 890,564 ordinary shares in the streaming company in 2018.
Going back to our Spotify share price high/low in April and early May ($170 vs. $143.99), this proposed Merlin stake would have therefore been worth anywhere between $128.2m and $151.4m.
In other words, MBW is very confident that Merlin recently sold over $100m in Spotify shares on the New York Stock Exchange.
Merlin, a non-profit, has had to distribute this sum amongst over 800 members representing tens of thousands of labels.
On to Universal.
UMG’s current stake in Spotify looks likely to make up somewhere around 3.5% of the streaming company – if, like Warner, the major’s seen its original holding (7% inc. EMI) approximately cut in half over the years.
A 3.5% stake would make Universal’s equity in Spotify – at the streaming company’s current market cap ($28.5bn) – worth approximately $1bn.
(Note: Universal may have upped this stake by buying further shares, but its stakeholding couldn’t have risen higher than 5% on April 3 or it would have showed up in Spotify’s pre-float filings.)
The interesting outlier in this narrative is Sony Music.
As covered at the start of this analysis, Sony (when it was Sony BMG) acquired an equity stake in Spotify of 6% in 2008.
By rights, following our Warner calculations, that number should have ended up somewhere near 3% when Spotify floated.
But it didn’t: the streamer’s fiscal filings clearly showed Sony’s stake stood at 5.7% on April 3.
Sources have told MBW that, at some point over the past decade, Sony has acted like a VC, buying up Spotify equity to boost its ownership stake in Daniel Ek’s company.
This certainly seems to play out. (According to our calculations, despite having dumped 50% of its stock, Sony still owns a 2.85% stake in Spotify.)
Here’s perhaps the most noteworthy thing about all of this: in its recent public announcement regarding its Spotify proceeds, Sony said: “Sony Music and The Orchard are committed to sharing with their artists and distributed labels any net gain they may realize from a sale of Sony Music’s equity stake in Spotify.”
Do you spot it?
“… any net gain”.
In other words, Sony is publicly committing to passing a slice of profits to artists from Spotify stock which it actually paid for with its own money.
An interesting addition to the ‘greedy majors’ narrative, no?
Oh, and one final bit of fun.
As mentioned, the major labels plus Merlin paid a total consideration of just €8,804.40 for an 18% stake in Spotify in 2008.
Guess how much this cumulative stake is now roughly worth – following a decade of equity dilution – ten years later?
$2.6bn.
Kerrr-ching!
