Why the Music Industry Should be Watching Twitter’s Stock Price

This is the chart that the music industry needs to be paying close attention to over the coming weeks and months (it’s Twitter’s stock price).  How well Twitter fares will be a bellwether for digital consumer service investments. Two of the music industry’s biggest bets (outside of the big tech trio of Apple, Amazon and Google) are Spotify and Deezer.  Both of whom are performing strongly (Deezer just hit 5 million paying subscribers and Spotify could be edging towards 10 – see my prediction from last year).  But both have also taken very significant amounts of investment resulting in valuations that markedly narrow the pool of potential buyers.  For Spotify in particular a flotation looks like the best route of realizing a strong return for its investors, particularly the later stage ones.

Facebook’s flotation rattled a lot of the investment community.  Although it eventually recovered and is now trading solidly, it sowed fear and uncertainty about the ability of digital consumer companies to translate business plan valuations into actual market trading value.  Those of a certain age recalled painful memories of the dotcom bubble bursting and the near instantaneous disappearance of billions of dollars worth of dotcom company valuations.

If Twitter’s stock price falters over the next 6 weeks or so then it will make an IPO all the more challenging to sell to the market.  But if Twitter does well, some of those lingering doubts and concerns will be assuaged, paving the way – in a best case scenario – for a new dawn of digital consumer company IPOs.

The stock market is a fickle beast and though underpinned by some of the most sophisticated financial modeling on the planet, is easily swayed by investor sentiment, which in turn is driven by that equally ineffable of qualities: momentum.  If Spotify can report 10 million paying subscribers some time over the coming months it will have a clear momentum story to tell.  If Twitter’s stock price holds up into the start of 2014 Spotify will be able to translate its momentum into market sentiment and build towards an IPO.

There is of course no guarantee Spotify, or Deezer, will IPO, but the option looks like a strong commercial and strategic fit given the direction of travel of the digital music market and the companies’ current valuations. If one or both companies successfully IPO or successfully exit via a trade sale or some other route then the music industry will be able to breathe a huge sigh relief and brace itself for a resurgence in digital music investment.

Right now digital music is not a great investment proposition for professional investors, especially VCs.  They see sizeable chunks of their investment disappearing straight onto the bottom line of record labels in the form of advances and guaranteed payments; a congested market that still remains predominately niche in reach; and the CD still lingering as the world’s largest music sales revenue source.  But get a couple of high profile exits under the belt and the music industry will appear a far more compelling investment proposition, with investors more willing to tolerate the costs of doing business in music.  First though, Twitter needs to deliver the goods. Keep watching that chart!