Mar 27, 2014 · 2 minutes

This morning, Quartz reported that Spotify is gearing up for an initial public offering in the Fall, according to sources familiar with the company's plans. At its last valuation, the Swedish streaming music service was worth $4 billion in the private markets.

When evaluating Spotify's chances on the public markets, it makes sense to look to Pandora's performance. While the companies have very different business models, both music services sport a massive user base and each have struggled mightily with profitability, burdened by royalty payments which, despite being insultingly low in the minds of many artists, eat into a huge percentage of their revenue (70 percent of Spotify's revenue goes toward royalty payments).

Pandora, which currently has a market capitalization of around $6 billion, did have a rare profitable quarter in Q4 2013, but experienced a slowdown in user growth and ad revenue per listening hours last year, leaving some analysts nervous. That said, the company has performed solidly especially compared to some of the other high-profile tech IPOs of 2011 like Zynga and Groupon.

The real question surrounding both companies remains: Can streaming music be a sustainable business?

Looking at Pandora's performance as a benchmark is helpful, though the companies face very different challenges. Pandora is a radio service so it's beholden to regulations enforced by US courts. They set the royalty rates Pandora must pay to performance rights organizations like ASCAP and BMI, who in turn distribute those royalties to performing artists. Earlier this month, the courts rejected ASCAP's attempts to raise these rates, which was a win for Pandora. (But as I'll detail in an upcoming post, the fight between Pandora and performance rights organizations is far from over.) In addition to performance royalties, Pandora also pays songwriter royalties through SoundExchange, whose rates are also set at a federal level by Copyright Royalty Judges.

Spotify, on the other hand, is an on-demand music service, meaning its royalties are not subject to rate courts and SoundExchange (with the exception of Spotify Radio service of course). These rates are negotiated on a case-by-case basis between record labels. So while Pandora had to camp outside Congress to stay alive, Spotify has to camp outside record label offices.

Whether or not that's an advantage or a disadvantage is subject to debate. But as today's Quartz article notes, one thing that may makes Spotify a more attractive investment than Pandora is the fact that the bulk of Spotify's earnings come from subscriptions as opposed to ads. As the service has scaled, however, the percentage of paid users has stayed around 25 percent. Considering the amount of cash Spotify continues to burn, it surely must find a way to increase that percentage, and many aren't convinced it can do that.

Regardless of whether Spotify is a good bet, the company itself may have no other choice but to go public. It's already raised over half a billion dollars in the private markets at ever-higher valuations. Going public may very well be the only way left for it to raise more money – and provide early investors and employees some liquidity. With new competitors like Beats Music and a rumored iTunes competitor looking to take a bite out of its business, money-losing Spotify needs all the cash it can get.

[Illustration by Hallie Bateman for Pando]