Ad blockers could hurt Spotify’s IPO

SPOTIFY free-tier users using ad blockers will soon be unable to run hacked versions of the popular streaming service. This revelation could hurt Spotify’s shares as the company prepares for its direct listing on the NYSE next month.

In Spotify’s recent SEC filing, the firm reveals around 2 million free-tier users bypassing ads.

“On March 21, 2018, we detected instances of approximately two million users as of December 31, 2017, who have been suppressing advertisements without payment.”

Spotify has since started to disable the app, along with a notification that reads:

“We detected abnormal activity on the app you are using so we have disabled it… To access your Spotify account, simply uninstall any unauthorized or modified version of Spotify and download and install the Spotify app from the official Google Play Store.”

The notification ends with a warning, “If we detect the repeated use of unauthorized apps in violation of our terms, we reserve all rights, including suspending or terminating your account.”

According to Spotify, their paid subscriber base is increasing steadily, from 30 million paid subscribers in March 2015, to 70 million in January this year. However, as Spotify explains, they have previously included users using adblockers in their key performance indicators.

Although they have since removed the users from these metrics, they “currently do not have, and may never have, the requisite data available to adjust such key performance indicators and other metrics prior to January 1, 2017.”

The timing of the revelation could adversely affect Spotify’s efforts in going public, as the previous numbers could be overstated.

Potential investors rely on data provided by the company and expect accurate figures to help with risk assessment. If the numbers were not as significant, it might have been negligible; but at 2 million users, this level of data error could undermine investor’s trust for the company’s data and integrity, causing stock prices to drop.

Given recent scrutiny towards Spotify’s financials and the company’s narrow margin of profit, this could compound further skepticism from investors. The company reported revenue of more than EUR4 billion (roughly US$5 billion) in 2017 but recorded operating losses worth EUR378 million (about US$461 million).

With a 21 percent margin, it is better than the 16 percent recorded in 2014, but it’s still burning quite a bit of cash.

Spotify planned for direct listing on NYSE on April 3. According to Reuters, the company expects shareholders to sell up to 55.7 million ordinary shares.

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