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Assess the likely consequences of stock market flotation for a business, such as Spotify - Edexcel - A-Level Business - Question 1 - 2019 - Paper 1
Question 1
Assess the likely consequences of stock market flotation for a business, such as Spotify. (10)
Worked Solution & Example Answer:Assess the likely consequences of stock market flotation for a business, such as Spotify - Edexcel - A-Level Business - Question 1 - 2019 - Paper 1
Step 1
Consequences of flotation
Answer
Stock market flotation often necessitates that a company, like Spotify, raise capital to invest in new and innovative products. For example, Spotify will require funds to enhance its music video subscription services. This capital can be raised through the sale of shares to the public, making flotation a vital strategy for funding.
Additionally, flotation provides Spotify with an opportunity to attract investment, particularly from institutional investors, which can lead to a greater market reach and competitive positioning, especially against companies like Apple and Google.
Step 2
Potential counterbalance
Answer
However, it is important to note that Spotify has yet to achieve profitability, which may deter potential investors. The inability to present a profitable business model might result in raised concerns about the feasibility of its stock flotation, leading to inadequate financing. If Spotify's performance does not meet investor expectations, further financial difficulties could ensue, potentially impacting its ability to innovate and expand its product offerings, particularly in competitive areas such as virtual reality.
Step 3
Potential judgment
Answer
The primary consequence of Spotify's stock market flotation is the potential to raise a significant amount of capital. This capital can provide the crucial financial backing needed for Spotify to better compete in the growing music streaming market, particularly against larger corporations like Apple Music and Google Play Music. Successful flotation could enhance Spotify's operational capabilities and financial stability, allowing for strategic investments and growth.