Will Another Lawsuit Derail Spotify’s IPO?

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One of 2018’s biggest initial public offerings (IPO) is expected to be Sweden-based streaming music service Spotify. The company is the streaming music leader in both revenue and subscribers, well ahead of Apple Inc. (NASDAQ: AAPL) and Amazon.com Inc. (NASDAQ: AMZN).

But Spotify’s path to its long-awaited IPO has been strewn with lawsuits from music publishers claiming that they are getting the short end of the stick when it comes to royalty payments. Last Friday, Wixen Music Publishers filed a lawsuit seeking $1.6 billion along with injunctive relief on behalf of artists including the late Tom Petty, Neil Young, Stevie Nicks, The Beach Boys, the late Janis Joplin and others.

Wixen’s claim is not exactly new. Last May Spotify tried to settle a similar class-action lawsuit by offering to pay $43 million to resolve the dispute. The settlement offer has not yet been approved by the court and at a hearing on December 1 the judge in the case said she would need more time to consider the settlement.

The lawsuits allege that Spotify is offering thousands of songs without a valid license. In its suit, Wixen claims that Spotify does not do enough to identify rights holders on the songs it licenses from record labels. In its filing Wixen wrote:

Prior to launching in the United States, Spotify attempted to license sound recordings by working with record labels but, in a race to be first to market, made insufficient efforts to collect the required musical composition information and, in turn, failed in many cases to license the compositions embodied within each recording or comply with the requirements of Section 115 of the Copyright Act. Either a direct license from Wixen or a compulsory license would have permitted Spotify to reproduce and/or distribute the Works as part of the Service …

Spotify depended on the music industry rights management firm, the Harry Fox Agency, to secure rights from the publishers. Wixen claims that “Spotify knew [that Harry Fox Agency] … did not possess the infrastructure to obtain the required mechanical licenses and Spotify knew it lacked these licenses.”

Spotify’s pre-IPO market value has been set at around $19 billion, even though the company has never turned a profit and continues to burn through cash at a ferocious rate. The company is reportedly planning a direct listing IPO on the New York Stock Exchange, a move that will save Spotify millions in investment banking fees, but that could backfire if the IPO craters. Spotify needs a positive ruling on its proposed settlement of the class-action suit, at least. That would give it some leverage over the monetary claim demanded by Wixen.

Spotify has relied on getting deals with the three major labels as the cornerstone of an IPO. The company has achieved that and without it we wouldn’t even be talking about an IPO. But there are other players, like Wixen, with skin in the game. While their claims won’t kill Spotify’s IPO, they can certainly do some damage.