The music-streaming service Spotify is doing what looks like some pre-IPO spring cleaning.
Spotify announced today that it has bought the company behind the algorithms it uses to power its personalized radio service. It is also reportedly talking to banks about establishing a credit facility, a common step before companies go public. And Spotify hired a senior executive from its newest rival, Beats Music, this week.
Twitter and Facebook both pulled off significant acquisitions (of MoPub and Instagram, respectively) and shored up their financing in the run-up to their high-profile public offerings. Spotify, which we’ve argued looks primed to soon do the same, hasn’t publicly commented on its plans.
The company Spotify bought, The Echo Nest, is a self-described “music intelligence” company, whose recommendation and personalization algorithm is also used by Spotify rivals such as Rdio, iHeartRadio, and Microsoft’s Xbox Music. (Pandora uses a more human approach; the “Music Genome Project” it uses to generate its playlist is mapped out by trained musicologists.)
Buying The Echo Nest may be Spotify’s hedge against the risk of losing control over an important part of the service’s platform. But it also makes the company more attractive to investors by providing new revenue streams. Among the existing customers for The Echo Nest’s products (which include data solutions and something called “audio fingerprinting”) are consumer brands such as Coca-Cola and Reebok.
At the moment, Spotify is basically a subscription business (unlike Pandora, its biggest rival, which makes the bulk of its revenue from advertising, as the chart below shows). The acquisition of The Echo Nest reduces Spotify’s dependence on subscription income, which, in theory, could make it more attractive to investors in an IPO, Piper Jaffray analyst James Marsh told Quartz.
“It does diversify their revenue streams to some degree,” Marsh said. “Now it’s more of a digital-streaming-music play than just a Spotify play.”
A spokesperson for Spotify declined to comment.