Spotify raises $526 million as Apple charges into music streaming

Fast-growing music streaming company Spotify is armed with half a billion dollars in new funding as it faces its most formidable challenger yet — Apple.

Spotify’s newly closed $526-million financing round puts the privately held firm’s value at $8.5 billion, according to people with knowledge of its finances. The amount makes the streaming service worth more than twice the market capitalization of Internet radio giant Pandora.

Analysts say the money will help Spotify bring in more customers by waging ad campaigns, expanding into untapped countries and improving its service with new features.

Spotify said Wednesday that it now has 20 million subscribers who pay $10 a month for unlimited, commercial-free access to music on the Web, double its number from May last year. That puts it well ahead of established rivals like Deezer (6 million paying subscribers) and Rhapsody (2.5 million).

But Apple is making its move onto Spotify’s turf. The Cupertino, Calif., tech giant on Monday unveiled its Apple Music service, which includes on-demand access to 30 million songs and a 24-hour live radio station. Apple is coming into the market with plenty of cash to spend on marketing, plus a huge user base of 800 million iTunes customers to convert.

Spotify has done little advertising so far. But its free option, which makes money from commercials, has helped it build a big audience. About 55 million people use the free tier, which includes on-demand Web access and a limited mobile phone app.

“It’s going to be a function of how well they hold on to their early position,” said Joe Rapolla, a music professor at Monmouth University and former record label executive. “It’s theirs to lose at this point.”

It’s unclear if Spotify is worried about Apple Music, which will not have a free tier. Spotify Chief Executive Daniel Ek responded cryptically to Apple Music’s debut, tweeting only two words: “Oh ok.” He then deleted the tweet.

Spotify has ramped up its service with video, podcasts, playlist recommendations and a feature for runners. It is licensing videos from the likes of Vice News, Nerdist Industries and Viacom’s Comedy Central and MTV. It has struck deals with video companies that make content for YouTube, including Maker Studios and Fullscreen, as well as traditional players such as NBCUniversal, ESPN and Turner Broadcasting.

The streaming service has also experimented with pricing schemes, including student discounts and a trial period of $1 for the first three months.

The infusion of funds could help Spotify get into new markets where people are just beginning to use mobile devices.

Analysts said the company probably will expand its global reach through deals with mobile carriers that could bundle the service with their phone data plans. Spotify has already struck such pacts with telecom firms in Germany, France, New Zealand and other countries. Spotify, which currently is not profitable, is also widely expected to pursue an initial public offering or be acquired by a larger tech company.

Whereas Spotify is now available in 58 markets, Apple Music is expected to launch in 100 countries on June 30.

As part of the financing round, Spotify received a $115-million investment from the publicly traded Stockholm-based telecom firm TeliaSonera in exchange for a 1.4% stake.

U.S. companies participating in the Spotify funding include Halcyon Asset Management, GSV Capital, D.E. Shaw & Co., Technology Crossover Ventures, Northzone and P. Schoenfeld Asset Management, said a person familiar with the matter, who was not authorized to comment publicly.

British investment firms Baillie Gifford, Lansdowne Partners and Rinkelberg Capital, along with Canadian hedge funds Senvest Capital and Discovery Capital Management, also took part.

The new round, first reported by the Wall Street Journal, brings Spotify’s fundraising to $1 billion to date.

Apple’s biggest hurdle will be getting users to pay for its music, especially those who grew up in the post-Napster era and are used to getting songs for free through YouTube and piracy sites, analysts said.

And free music has proved to be a powerful draw. It attracts about 76 million users to Pandora a month, according to the Oakland company’s regulatory filings.

While Spotify’s free tier has helped cut down on illegal downloads, the company has taken flak from prominent artists because of the low royalties from ad-supported streaming.

Spotify has defended its strategy, saying the free tier has enticed millions of people to subscriptions. The company also says it has paid $3 billion in royalties to record labels and music publishers, including $300 million in the first quarter of this year.

Apple’s dealing with the music industry has also attracted scrutiny. Attorneys general for New York and Connecticut are investigating Apple’s negotiations with the music companies for the service, to see whether they worked together to suppress the availability of free, ad-supported plans offered by Spotify, YouTube and others.

The Apple Music negotiations also are being investigated by the European Commission.

Mark Mulligan, a music industry analyst at research firm Midia, said it’s possible that Apple will emerge as the market leader in subscription music streaming. Still, he said, the market will be big enough for both Spotify and Apple Music to coexist.

“This is not going to be a winner-take-all market,” Mulligan said. “Spotify has enough money to ensure it will be able to compete around Apple for a while.”

ryan.faughnder@latimes.com

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