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TheStreet Open House

Spotify Is Overvalued, but That Really Doesn't Matter

Stocks in this article: NFLX P GOOG

NEW YORK (TheStreet) -- If I had a beer every time I heard somebody make a Netflix (NFLX - Get Report)-to-Spotify comparison, I'd be more drunk now than I plan on getting at TheStreet's holiday party Thursday night.

Yes, Spotify pays a ton of money for content by doing direct deals with content owners. Same as Netflix. But that's about where the similarities, as far as I know, end. That's fodder for another article.

However, pursuant to why it doesn't matter that Spotify is overvalued, there's only one super-valid Netflix comparison to make.

Technology Crossover Ventures (TCV) bankrolled Spotify's recent round of funding, taking it to a multi-billion dollar valuation. TCV has also been a big NFLX investor. The firm remains a major investor. And TCV is damn good at what it does. Damn good.

(Disclosure: TCV also has an equity stake in TheStreet (TST)).

TCV is savvy. They have won big with Netflix. They will win big with Spotify. They wouldn't have it any other way.

Spotify can send its Chief Revenue Officer around the country all it wants. It can make mobile listening free in an effort to generate the scale necessary to sell meaningful amounts of advertising and compete with Pandora (P - Get Report). It can put its very likable and competent CEO Daniel Ek in front of the media to make Spotify's optimistic bull case.

It can do all of these things. And, while I'm not here to say the people on the ground, doing the work at Spotify don't believe in their mission, I am saying that, for better or worse, it amounts to noise between massive financial transactions.

The end game for Spotify is, ultimately, getting acquired.

It will either happen before an IPO or after an IPO, but, either way, sooner or later, it will happen. It has to happen because Spotify has about zero chance of achieving the health and stability Pandora's business currently enjoys. And Pandora still has a ways to go. TCV knows this. It has to.

When the next financial transaction occurs, TCV makes out nicely.

And then somebody like Google (GOOG) comes along, swallows Spotify into its apparatus and we forget that Spotify ever even existed as a standalone company trying to make a go of it.

Call it the Silicon Valley shell game, even if it doesn't always play out solely in Silicon Valley.

And I'm OK with this.

Spotify is good for Internet radio. It's good for Pandora. It's good for tech. And it will be a nice addition to whomever buys it.

Ek said it well the other day in an interview with All Things D's Peter "Don't Call Me Franz" Kafka:

Streaming is just in its infancy. So more competition means more awareness for the sector, which I think is pretty good. And when people say there's more competition, they forget that when we entered the marketplace, there was actually more competition.

I just wish Internet radio would compete less and join forces more to punkslap the music industrial complex upside the head even harder with a picture of the future now.

--Written by Rocco Pendola in Santa Monica, Calif.

Rick Pearson is a private investor focusing on U.S.-listed China small-cap stocks. Until 2005, Pearson was a director at Deutsche Bank, spending nine years in equity capital markets in New York, Hong Kong and London. Previously, he spent time working in venture capital in Beijing. Mr. Pearson graduated magna cum laude with a degree in finance from the University of Southern California and studied Mandarin for six years. He has frequently lived, worked and traveled in China since 1992.

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