We've covered music streaming service Guvera Limited (ASX: GUV) a number of times over the past few weeks (here and here) as media hype builds over the potential IPO of the company.
There are a few reasons why a number of commentators are up in arms over the float of the company – it's not just one issue…
- Concerns over related party transactions and fees paid to related parties
- Lack of revenues compared to potential valuation ($1.2 million against 1.3 billion+)
- Relatively small number of clients and users
- Huge losses in previous years and likely ahead
- Reports that accountants have placed a large number of self-managed super fund clients into the company and fears the trustees may not understand the risks
- If the company can't list, it will likely fall into administration
- Outcome of ongoing court cases unknown
- Insufficient detail in the prospectus
- Questions about whether the regulator and the stock market operator have the right to decide if Guvera has the right to attempt to list on the ASX
- The demise of multiple streaming media companies over the years
One thing we have covered in a little detail are the company's competitors, which represent a huge risk to Guvera and we think have been insufficiently covered by the company in its prospectus.
Guvera named Spotify, Deezer and Pandora as its main competitors in the prospectus, but those are far from the only competitors. The stats cited by the company in the prospectus compare Guvera's total existing users to the number of users of those companies from a report published in December 2014. That's 18 months ago – and the numbers have changed significantly since.
Streaming media is a hotly contested space, with market leader Spotify competing against tech giants Apple Music, Google Play, Amazon, Pandora and numerous others. That is one of the biggest issues with Guvera – and how it can survive in the face of intense competition from multi-billion-dollar tech giants. Not only do they have much larger user bases, but also bigger music libraries and huge pockets of cash.
The big US companies (Apple, Google and Amazon) could potentially run their music businesses as loss-leaders, enticing customers to spend more on other services and products in exchange for free music. That would make it virtually impossible for standalone music streaming businesses to survive.
Foolish takeaway
The bottom line is that Guvera could be compared to streaming video provider Quickflix – which went bust not long after Netflix arrived in Australia. Simply, the risks are too high.
Buyer beware.
