Spotify and Dropbox make vows: Love us, we’ll change | Tech News

Spotify and Dropbox make vows: Love us, we’ll change

Spotify and Dropbox have both filed for IPO.

| Updated on: Aug 19 2022, 22:03 IST
Spotify is said to plan its New York listing starting April.
Spotify is said to plan its New York listing starting April. (Shutterstock)

It's inevitable to compare Spotify and Dropbox. Both are relatively well-known internet companies that are seeking to debut on the stock market about the same time. They're both unprofitable but also savvy about persuading freeloaders to pay for subscriptions.

And both Spotify and Dropbox have a similar aspirational pitch to potential stock buyers: Don't love us for what we are today. Instead, please focus on what we might be in the future. It's true that investors want companies to have a vision far beyond the present day, but Spotify and Dropbox are unusual in nudging investors to look past the somewhat awkward or flawed businesses they are now.

You may be interested in

MobilesTablets Laptops
Apple iPhone 15 Pro Max
  • Black Titanium
  • 8 GB RAM
  • 256 GB Storage
28% OFF
Samsung Galaxy S23 Ultra 5G
  • Green
  • 12 GB RAM
  • 256 GB Storage
Google Pixel 8 Pro
  • Obsidian
  • 12 GB RAM
  • 128 GB Storage
Apple iPhone 15 Plus
  • Black
  • 6 GB RAM
  • 128 GB Storage

At the tail end of a bombastic presentation last week by Spotify Technology SA for its not-IPO stock listing, the company gave a glimpse of its future. A company that has fought to become a not-terrible (although still not good) business set a long-term target of continued healthy revenue growth and -- this was a surprise -- gross margins of about 30 to 35%.

Also read
Looking for a smartphone? To check mobile finder click here.

As a reminder, gross margin percentage is a company's revenue minus its basic costs to make and deliver its product, expressed as a percentage of sales. Typical internet company margins are high, and both Netflix Inc. and Pandora Media Inc. have gross margins of about 35%. By contrast, Spotify needed a big break from the music industry powers to get its gross margin up to 24.5% in the fourth quarter of 2017, and even then the company posted an operating loss. Pushing up its gross margins into Netflix territory would give Spotify a better shot at being a viable company.

But to get there, Spotify said it would need to become a fundamentally different company. The chief financial officer mentioned briefly that Spotify's long-term gross margin target is predicated on Spotify expanding its businesses in areas other than subscription music streaming, which now generates 90% of the company's revenue.

Presumably that includes sales of advertising, concert ticketing, promotions for musicians and other revenue opportunities that are either relatively small or nonexistent for Spotify today. For investors to believe that Spotify's financial health will improve significantly, they need to bet on a material diversification beyond the subscription music model that has been Spotify's focus for 10 years.

Dropbox Inc., too, has the audacity of hope. About 70% of Dropbox's paying users are individuals who buy the software on their own. Those people might be using Dropbox for their jobs and persuading their co-workers to do the same, but they have decided to pay for Dropbox as individuals.

Now look at Dropbox's video presentation to potential IPO investors. All of the Dropbox customers featured in the video are businesses -- tiny, medium and large -- not the individuals who make up the vast majority of Dropbox's paying customers. Businesses also were the featured customers in Dropbox's financial prospectus to potential investors.

To be fair to Dropbox, business subscriptions are the fastest growing part of the company, and it is Dropbox's strategy to start with a handful of workers as customers and then persuade the whole company to pay up. But by training its camera lens on businesses, it's clear Dropbox would rather be among the gaggle of relatively richly valued companies that sell software to businesses than the lonely category of consumer-paid software it occupies today. Dropbox would like more subscribers like Expedia, featured in its video and prospectus, than like you and me.

Look, all stock market newcomers are coin-flip bets on potential rather than current circumstances. Facebook at the time it went public had almost no revenue from mobile advertisements, which now generate nearly all of its revenue.

But Spotify and Dropbox are different from many stock market debutantes that came before. They are not young up-and-comers. They are decade-old companies with relatively long track records in their core businesses. They are valued at far-from-newborn valuations of $10 billion (Dropbox) and perhaps more than $15 billion (Spotify). And yet both companies want investors to look past their current condition and imagine a beautiful metamorphosis into different kinds of businesses entirely.

Those bets on a magical future may pay off. But it's not a great idea to enter into marriage hoping your spouse will change fundamentally. That's what Spotify and Dropbox are asking their investors to do.

Catch all the Latest Tech News, Mobile News, Laptop News, Gaming news, Wearables News , How To News, also keep up with us on Whatsapp channel,Twitter, Facebook, Google News, and Instagram. For our latest videos, subscribe to our YouTube channel.

First Published Date: 20 Mar, 10:32 IST