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Turning Tides of the Underwriting Industry

To ring the opening bell of the New York Stock Exchange is a symbol of tremendous accomplishment to those in the business sphere. On the day of a company’s initial public offering (IPO), the NYSE traditionally invites representatives of that company to ring the bell to begin trading in order to commemorate the lofty achievement of becoming a public company. However, behind all this excitement on the trading floor on Wall Street, the fate of these newly public companies and the investment banks that underwrite them are facing a dangerously changing market where they have potential to lose significant revenue gains. In order to be traded publicly, a company needs to go through a stock issuance process called underwriting. This is facilitated by investment banks who properly value the company’s shares and connect interested investors to the company. Once the banks find enough demand for the share at the price they have determined, the company is confirmed into the stock exchange and is available to be traded publicly. Typically, this costs the company millions of dollars in service fees, usually about 7% of their IPO earnings, and the investment banks make a huge profit from underwriting fees, which is one of the investment banks’ biggest source of revenue.

However, Spotify is diverging from the typical process of going public. The growing music-streaming service has been preparing to go public for nearly a year, but it has opted to take up some of the process itself. Instead of the investment banks allocating shares to buyers, the Swedish startup opted for an unusual method of finding investors through direct listing. This means that Spotify will list its shares directly on the NYSE for interested investors to buy themselves rather than using the bank as a middle man.

Although Spotify is taking a large risk in proceeding this way, it is seeking to expand its roster of investors rather than raise a lot of capital. In doing this, the amount that Spotify owes to the investment banks--the middlemen of the process--is a fraction of the usual cost of underwriting. It is estimated that it would save nearly $300 million in fees for Spotify by doing this. If the IPO is successful, other companies interested in going public may follow in Spotify’s wake by becoming more independent from the investment banks. This poses a potential threat to the investment banks as they would be losing a large percentage of their income if direct listing becomes more of a common trend among companies seeking to go public.

The equity capital markets division of investment banks typically account for about ⅙ of total revenues. This division deals with underwriting companies’ IPOs and connecting buyers with shares. Losing this revenue to direct listing companies would surely be detrimental, but it would not be the end of investment banks as we know it. Not every company seeking to go public will opt for direct listing; Spotify is in a unique position where it can afford to employ this technique. Other companies who need a reliable source of new investment money will likely not risk direct listing and rather be underwritten, even if direct listing methods prove to be successful.

Last March, Snapchat (SNAP) had its IPO, valuing each share at $17, which was more than investors had expected. Spotify is in a similar position to Snapchat right before its own IPO. They are both technology companies driven by their widely-used smartphone applications valued at $20 million before their respective IPO’s. Although Snapchat opened better than expected, its performance beyond its IPO date was poor, marking the price on its first day of trading as its historical high. The declining share price was largely due to investors concerns over the lack of user growth on the app. Another major factor for its decline was because of its high volumes of unsold inventory of the Spectacles glasses. Snapchat overestimated the demand of the Spectacles and overproduced, leaving many sitting in a warehouse.

Analyzing Snapchat’s performance provides a suitable indication of how Spotify will stack up in the stock market. Spotify does not have the issue of unsold physical inventory, but if its direct listing method proves to be unsuccessful, then Spotify’s share chart might take a similar shape to Snapchat’s. Spotify may encounter the same problem that Snapchat did in regards to user growth, which could have detrimental effects on the share price.

On the investment bank side of the IPO process, there is a risk that other big private tech companies will go the direct listing route in order to offer shares publicly. Uber and Airbnb are potential candidates for going public without the help of the investment banks. As the number of IPO’s per year continues to drop, investment banks should be concerned about this possible industry adjustment. If Spotify’s risky method works successfully, the investment banks will likely miss out on more underwriting fee revenues.

As Spotify prepares to make the move toward public investment, it is causing movements within the IPO system itself. Performance of the share price beyond the IPO date is mere speculation at this point in time, even though Spotify’s IPO is predicted to be the largest of this year. The challenges now posed to private companies preparing to go public and the investment banks that underwrite them will determine how the market changes in reaction to Spotify’s direct listing. Everyone will be watching Spotify when the day arrives.



Wells, Georgia. “Snap Plunges Nearly 20% as Quarterly Loss More Than Triples.” The Wall Street Journal, 7 Nov. 2017.

Farrell, Maureen, and Alexander Osipovich. “Bankers Begone! Spotify to Get Clearance for an 'Underwriter-Less' IPO.” The Wall Street Journal, 21 Dec. 2017.

Wilmot, Stephen. “Spotify, Like Google, Wants to Reinvent the Tech IPO.” The Wall Street Journal, 5 Dec. 2017.

“Global Investment Banks Revenue by Product Group.” Statista, Jan. 2017.

“Market Summary of Snap Inc.” Google Finance, Jan. 2018

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