Spotify just took a step towards raising as much as $1 billion in an initial public offering, and analysts say it might need every cent of it to continue competing with the likes of Apple Inc. (AAPL) , Amazon.com Inc. (AMZN) and Alphabet Inc. (GOOGL) .
The Sweden-based streaming music leader filed its initial public offering prospectus with the SEC on Wednesday. In the prospectus, Spotify said it has 159 million monthly active users and 71 million paid subscribers, and estimated that its number of paid subscribers was nearly double that of Apple Music's.
While Spotify, which launched in 2006, has a commanding lead right now, Creative Strategies president Tim Bajarin said that the company raises will not compare to the "war chest" available to its closest rival, Apple Music. At the end of 2017, Apple had $285.1 billion in cash.
"Apple will always have financial means well beyond what Spotify will," Bajarin said.
Apple's streaming service, which launched in June 2015, makes it easy for the 1.1 billion iOS users worldwide to subscribe seamlessly, Bajarin noted. He added that Apple Music is also creating more original content and tapping into music festivals and special promotions, an area in which Spotify lags behind.
For its part, Bajarin said, Spotify must aggressively invest in marketing and content to compete with Apple Music, which starts at $9.99 a month; Amazon (AMZN) Prime Music, which is included in the cost of a $99-a-year Prime subscription; and Alphabet's Google Play Music and YouTube Red, which both offer streaming video and music for $9.99 a month. Spotify Premium also starts at $9.99 a month.
Needham analyst Laura Martin said Spotify is competitive with its artificial intelligence-driven algorithms that tailor recommendations and playlists to user preferences.
Spotify's app is also cross-platform, making it more popular with the Android users that account for the majority of smartphone users, Loup Ventures managing partner Gene Munster said, adding that competitors from Google Play and Amazon Prime Music are available on any device as well.
Beyond that, Spotify is simply more of a hip music brand than its larger competitors, Loup Ventures managing partner Gene Munster said.
"[Spotify has] a respected music brand, whereas Google, Amazon and Apple don't," Munster said. "They're seen as these stodgy tech giants."
AI and street cred won't be long-term advantages, "but what will be is content," Munster said. "Spotify has to do something that's never been done ... create the Netflix of streaming music" and create lots of exclusive original content.
While Spotify does have some original content and has featured savvy partnerships with other companies, such as its recent collaboration with Netflix's Stranger Things that matched users with a character and a playlist based on listening history, "the only way [to compete] is if Spotify is smart and uses the revenue from the public offering in wise ways to stay competitive," Bajarin said. "While Apple may surpass them over time, they will still be a very viable competitor."
Apple shares were falling 1.5% to $175.49 on Thursday afternoon. Amazon shares were down 1.2% to $1,493.68, while Alphabet shares was down 1.8% to $1,084.12.