SPOT - Spotify

[oscarazocar]

SPOT should acquire Overcast, which is an incredibly good podcast app and I believe owned by one guy.

[Liberty]

SPOT should acquire Overcast, which is an incredibly good podcast app and I believe owned by one guy.

 

Marco Arment just said on his last podcast that he got plenty of offers and doesn't intend to sell. Said everybody has a price but that his price is really high..

 

Also, one of his main things for making Overcast is to keep the podcast ecosystem free and vibrant, so he's not happy about the exclusive games and walled gardens and ad-tracking stuff:

 

https://twitter.com/marcoarment/status/1262824593494073345?s=20

[chesko182]

"We interviewed the Former CEO of EMI Group, one of the four largest record labels globally and now owned by Sony, on the structural changes in the music industry and Spotify's opportunities."

 

https://blog.inpractise.com/spotify-vs-record-labels/

[griezeman23]

Anyone have a sense of what SPOT looks like in 10 years?

 

My conservative guess would be $4 / month per subscriber * 12 months * 25% GMs = $12 in GP per subscriber. I assume $4 / month per subscriber b/c the tilt will become more international.

 

I think the SS has talked about a TAM of 1bn for music streaming... There were 278mn in 2018. SPOT had ~100mn at YE18. So let's assume 35% market share at maturity. Could be higher as SPOT flywheel begins to turn plus the fact that no. 2, Apple Music, is basically constrained to the iPhone ecosystem. That puts SPOT at 350mn subscribers.

 

So subscription GPs come out to $4.2bn.

 

Average revenue per ad-supported user is roughly $5 / year ($0.45 per month). Let's assume we see that grow 50% in 10 years (it grew 30% from $0.34 to $0.45 from 2016 to 2019 and this was pre-podcasts).

 

Let's assume then that ad-supported users end up at 350mn in 10 years as well (I know that ad-supported is 20% to 30% larger today but I have a tough time conceptualizing how big ad-supported could really be).

 

Let's assume GMs run at 20% (a bit higher than today which is in the high teens.). That's $7.5 * 350 * 20% = $500mn in GPs.

 

So we have a business in 10 years at $5bn or so in GPs. IIRC, they think they can run the rest of the business at 10% to 15% of revenues - please correct me. So with a biz @ ~22.5% GMs, this means operating income would be somewhere b/w $2.5bn & $1.5bn.

 

Let's assume a FB / GOOGL multiple on the ad-supported business of ~12x. Then assume the subscription business is worth closer to 20x - this will depend more on what rates look like in 20 years but I am not betting on what that looks like. Biz is split roughly 85/15 in terms of profits so a multiple in the mid- to high-teens seems right. Let's call it 17x.

 

17x * $2bn = $34bn business. This is where we are today. Inclusive of dilution then this looks worse. But this would be offset by accumulated cash flows plus the TME position plus current cash. Just trying to get some rough number sdown.

 

Of course, my numbers can be wrong: both lower or higher. I'd think the P() is skewed towards the upside but of course the market is discounting that today.

 

Then you also have to account for all the implicit options in the business. How successful will podcasts be? Will they pivot into video? How much can they flex GMs? Will artists go towards more independent labels as supposed by the above inpractise interview? What other new businesses will they add?

 

You can certainly say the valuation looks frothy on what the business looks like today relative to where it will be in the future. However,  I would think this type of thinking fails to recognize the optionality the business has (which is probably what the market is discounting). Of course, that could be some confirmation bias on my part.

 

Am I racing out to buy shares today? Certainly not but I would not to be on the other side of the trade right now. I am pretty neutral on shares today at $180ish.

 

 

[jfan]

Here is my best guess on intrinsic value:

 

If 2030 Global Population = 8.59 billion (2020 = 7.7 billion growing at 1.1%),

where 75% of this population is over 15 years old who can purchase a smartphone that in turn has a 75% smartphone penetration (I've ignored other devices given that fact that it would unlikely that you have an alternative device before having a smartphone). Roughly 23% of people listen to audio on their smartphone that may grow to 50% in 10 years (assuming that streaming will take over the 10% that listen to audio on their computer, 4% from CD players, and 30% of the 47% that use a radio receiver).

 

This would put the total number of potential streamers at 2.4 billion people in 2030 up from my estimate of 983 million people today.

 

~ 35% of today's audio streamers subscribed to a paid-audio service. Assuming the same percentage in the future, this would put about 852 million global subscribers.

 

Spotify has 36% of the total number of global subscribers. Assume that in 10 years, they can take 1/3 of the 11% of the current market that is occupied by Pandora, Deezer and others. This would put their market share at ~ 41% or 349 million Premium subscribers.

 

The current ratio of Ad-supported sub to Premium-sub at Spotify is 1.45. Assuming no change, this would mean that there would be 506 million Ad-supported subs.

 

The unit value of the Ad-support sub would best framed as revenue per Ad-supported sub daily listening minutes (analogous to unit economics for railways - revenue per ton mile). The revenue can be broken down into music-related advertising and podcast-related advertising. Today, this is $0.33 per ad-supported sub daily minute. Using current podcast advertising rates is $15-30 Cost per 1000, I figure it is possible to earn ~$2 per user daily minute. (* premium subscribers will be exposed to podcast ads as suggested by management) These values could increase with inflation at 2-3%. (in euros)

 

My estimates of current and future daily minutes streamed are (based on Share of Ear data, Premium sub listen 3x more than Ad-supported sub, Global Music streaming growing from 16% to 45% [from capturing market share from owned music and car radio play], Podcast streaming growing from 4% to 9%):

Today:

Premium sub (music): 58 minutes

Ad-supported sub (music): 19 minutes

Premium sub (podcast): 14 minutes

Ad-supported sub (podast): 5 minutes

 

2030:

Premium sub (music): 162 minutes

Ad-supported sub (music): 54 minutes

Premium sub (podcast): 32 minutes

Ad-supported sub (podast): 11 minutes

 

(Today, people listen to ~ 200 minutes of audio per day across all devices)

 

Assuming that the annual revenue per premium user does not change from its current $49 (euro).

 

The future total revenue (euros) in 2030 would be:

1) Premium subscription fees = $23 billion

2) Music Ad-supported revenues = $12 billion

3) Podcast Ad-supported revenues = $86 billion

 

For a total of revenue of $121 billion (euro).

Assuming at that point, they can achieve a 10-15% operating margin if they can achieve a 30-35% gross margin with a significant reduction in marketing expense.

They might deserve a future 1-1.5x Price:Sales multiple.

 

It seems that Spotify's growth is largely funded by deferred revenues and accrued label royalty payment liabilities. ~ 6% of their own capital needs to be invested for this growth.

 

Using a 4% share dilution drag, 8-10% discount rate, I estimate that the current value should be somewhere between $210-366 (USD) per share contingent on streaming becoming a prominent daily share of ear, there are no significant unit price erosions in music and podcast advertising revenues from competition, and Spotify maintaining or slightly increasing global subscriber market share.

 

 

 

 

 

 

 

[spartan]

I’m a diehard music fan and love Spotify. Having said that, if Apple or Amazon offered music for free (in addition to their other services), I would cancel my subscription in a heartbeat.

 

People don’t subscribe to music apps for podcasts; they subscribe for the music. The recent flurry of exclusivity deals with podcast content creators is just another sign that they need to keep spending to maintain growth. What happens when those contracts expire? Getting Joe Rogan now just means you’re going to have to pay Joe Rogan WAY more later on. And what’s to stop the most popular podcast creators from creating a cartel themselves, similar to what the big 3 record labels have done?

 

Spotify doesn’t actually *do* anything. They distribute content that other people own. They’re like a glorified grocery store, only worse because they can’t produce their own “private label brands“. The major record labels won’t allow them to build their own label, so it will be hard for them to enjoy outsized margins.

 

The only feature that retains Spotify’s most loyal customers is the annual “most played” playlists, which is admittedly pretty cool. But in the event that Apple or Amazon offers these services for free (or markedly cheaper), I’m cancelling my subscription.

 

This could all work out nicely and I could be entirely wrong. But in my opinion, their long-term FCF is still fundamentally unknowable at this stage, and for that reason, it’s a no for me dawg.

[Spekulatius]

I’m a diehard music fan and love Spotify. Having said that, if Apple or Amazon offered music for free (in addition to their other services), I would cancel my subscription in a heartbeat.

 

People don’t subscribe to music apps for podcasts; they subscribe for the music. The recent flurry of exclusivity deals with podcast content creators is just another sign that they need to keep spending to maintain growth. What happens when those contracts expire? Getting Joe Rogan now just means you’re going to have to pay Joe Rogan WAY more later on. And what’s to stop the most popular podcast creators from creating a cartel themselves, similar to what the big 3 record labels have done?

 

Spotify doesn’t actually *do* anything. They distribute content that other people own. They’re like a glorified grocery store, only worse because they can’t produce their own “private label brands“. The major record labels won’t allow them to build their own label, so it will be hard for them to enjoy outsized margins.

 

The only feature that retains Spotify’s most loyal customers is the annual “most played” playlists, which is admittedly pretty cool. But in the event that Apple or Amazon offers these services for free (or markedly cheaper), I’m cancelling my subscription.

 

This could all work out nicely and I could be entirely wrong. But in my opinion, their long-term FCF is still fundamentally unknowable at this stage, and for that reason, it’s a no for me dawg.

 

Amazon music does offer music for “free” if you have  Prime anyways. I use it and the catalogue isn’t too bad.

 

I don’t think Spotify will get to 40% market share, but could be wrong. I think there will be a lot of niche and local competitors propping up.

[glorysk87]

I’m a diehard music fan and love Spotify. Having said that, if Apple or Amazon offered music for free (in addition to their other services), I would cancel my subscription in a heartbeat.

 

People don’t subscribe to music apps for podcasts; they subscribe for the music. The recent flurry of exclusivity deals with podcast content creators is just another sign that they need to keep spending to maintain growth. What happens when those contracts expire? Getting Joe Rogan now just means you’re going to have to pay Joe Rogan WAY more later on. And what’s to stop the most popular podcast creators from creating a cartel themselves, similar to what the big 3 record labels have done?

 

Spotify doesn’t actually *do* anything. They distribute content that other people own. They’re like a glorified grocery store, only worse because they can’t produce their own “private label brands“. The major record labels won’t allow them to build their own label, so it will be hard for them to enjoy outsized margins.

 

The only feature that retains Spotify’s most loyal customers is the annual “most played” playlists, which is admittedly pretty cool. But in the event that Apple or Amazon offers these services for free (or markedly cheaper), I’m cancelling my subscription.

 

This could all work out nicely and I could be entirely wrong. But in my opinion, their long-term FCF is still fundamentally unknowable at this stage, and for that reason, it’s a no for me dawg.

 

This is a profoundly weird take. So basically distribution businesses are crappy, is what you're saying? Historically, owning distribution and then layering a proprietary offering over it has been an extremely powerful combination, across many industries.

 

Also - as someone else said, AMZN does offer music for free. You should go try it out.

[chesko182]

I’m a diehard music fan and love Spotify. Having said that, if Apple or Amazon offered music for free (in addition to their other services), I would cancel my subscription in a heartbeat.

 

People don’t subscribe to music apps for podcasts; they subscribe for the music. The recent flurry of exclusivity deals with podcast content creators is just another sign that they need to keep spending to maintain growth. What happens when those contracts expire? Getting Joe Rogan now just means you’re going to have to pay Joe Rogan WAY more later on. And what’s to stop the most popular podcast creators from creating a cartel themselves, similar to what the big 3 record labels have done?

 

Spotify doesn’t actually *do* anything. They distribute content that other people own. They’re like a glorified grocery store, only worse because they can’t produce their own “private label brands“. The major record labels won’t allow them to build their own label, so it will be hard for them to enjoy outsized margins.

 

The only feature that retains Spotify’s most loyal customers is the annual “most played” playlists, which is admittedly pretty cool. But in the event that Apple or Amazon offers these services for free (or markedly cheaper), I’m cancelling my subscription.

 

This could all work out nicely and I could be entirely wrong. But in my opinion, their long-term FCF is still fundamentally unknowable at this stage, and for that reason, it’s a no for me dawg.

 

I'm also a bit confused and would appreciate it if you would expand more on this, as typically users who "love" Spotify and listen to a lot of music, tend to be pretty sticky, especially if they have been around for a while. This comes from building out your personal catalog of playlists, songs, albums and artists over the years and the fact that the platform gets to know you extremely well over time and all that data becomes an advantage for finding new music (a role traditionally performed by radio which is now the equivalent of being featured in a Spotify playlist - this hasn't been monetized and radio is a 25+B industry) and giving you exactly what you want to listen to (the tailored playlists like Discovery weekly, Daily mixes etc.). On top of that you have a very intuitive and superior UX, much better curated playlists, social effects from having friend's & artist playlists and listening habits, network effects from other people (and artists) sharing songs in social media and messaging etc (imagine being 18 years old and sending an Amazon music playlist to your crush :|). And finally the price point is really low for all the value you receive as a user, especially if you're consuming an hour of content a day (which is the average). 

 

Of course all of this matters a lot IF you listen to a decent amount of music, if you're a very casual listener you might not care and just go for a the cheaper version.

[spartan]

glorysk87: Did I say “distribution businesses are crappy”? No, so don’t put words in my mouth. My argument is that Spotify’s playlists are composed of songs that aren’t owned by them, and more importantly, will never be owned by them. Labels will never relinquish that power. They will never allow Spotify to become a “label”.  As you recall, Spotify effectively tried doing that a while back, but the labels retaliated and Spotify acquiesced. They will definitely help Spotify grow for their own selfish reasons, but in the end, my bet is that content matters more than distribution and that the labels hold more power and can extract more value out of Spotify than the other way around. Ben Thompson has made a similar argument (“Spotify has a marginal cost problem”). I agree with him. As for playlists, they can be made by anyone on any platform. IMO, playlists are not a durable competitive advantage. “Layering a proprietary offering”, as you mention, would be nice. But what have they done that others can’t? What’s so proprietary about what they do? I’m genuinely interested and willing to change my mind. Is it their UX? Admittedly, it’s way better than their competitors as chesko182 mentions. But does that justify their current EV of $48 Billion? Don’t you think competitors will learn from them and adapt? And mind you, these aren’t normal competitors. They’re the largest, most powerful companies in the world. (Apple, Amazon, Google) Then again, maybe these companies are too big to care about music… and maybe I’m underemphasizing the importance of UX. But I’m not willing to make a bet without this information which, at this stage at least, is unknown.

 

Chesko182: I disagree on the stickiness argument. Sure, users love their playlists. But most of the time, they don’t listen to their own playlists. They listen to playlists created by (1) other humans, which is replicable (2) Spotify themselves which, again, is replicable by competitors. Do you listen to Discovery Weekly on a regular basis? I don’t. It’s usually garbage. Not saying all of their playlists are garbage, but they’re also not infallible or irreplaceable. Stickiness also implies price inelasticity which, as you mention, is not applicable to the casual listener. How many casual users exist? No one really knows. My wife has had Spotify for 4 years and has never made her own playlist. That could mean two things: (1) She loves Spotify’s playlists so much that she is less willing to switch, because competitors can’t create similar playlists. (2) She is less tied to the product because she hasn’t made any of her own playlists. My money is on option 2. I agree with what you say about the “social effects”. IMO this is the strongest argument for buying Spotify, because it’s slowly being viewed as more of a status symbol. All the cool kids have it. As you mention, sharing a song through Amazon shows that you aren’t “with it”. And as an artist, getting to the top of their playlists is a big win. But maybe this is overemphasized. "Coolness" comes and goes. Also, not sure about you, but when I share songs, it’s typically done through YouTube… that way, I know the other person can access the song.

[Spekulatius]

I couldn’t value SPOT and just bought a bit of VIV.PA and called it a day. I didn’t need to go fancy to justify what I paid for Vivendi. I think Vivendi got a decade worth of growth from the streaming business, perhaps more.

[villainx]

I'm a fairly diehard music fan, almost all genres.  I originally bought all my own music, or got mixes/rips from friends.  I stopped buying music (or it stopped being a credible option) when my first kid was born.  I mostly stopped listening to music for a couple of years as baby rearing took up most of my free time.

 

When my kid(s) became more music listening ready, I haven't relied on any of my downloaded music.  Instead made playlist from Amazon Music (free with Prime version).  Amazon Music hasn't been perfect, since I'm a little picky with my kids (and now grownup's) playlist, but it gets 75% of what I'm looking for. 

 

I don't know, maybe in 2-3 years, when kids are more independent, and I have adequate free time, I might pay for streaming.  But it hasn't been on my radar for 6 years prior (and best case, 2-3 years more).  Admittedly, I don't think I'm a representative case.  Since I have a wide-ish genre interest, so broader choice.  But it would take, caring about newest release, and attending concerts, to get me tempted to spend extra money on music. 

 

Just another anecdote, if anyone cares.

[dwy000]

Whenever I start to think about Spotify I always come back to the fact that Amazon is willing to give away Spotify and a poor man's Netflix solely as an extra enticement to get you to sign up to be a Prime customer.  How do you compete with that without a massive proprietary library to differentiate?  They seem to be doing something to sign up payers but maybe it's just the cheapskate in me that doesn't understand the business case here.

[villainx]

Whenever I start to think about Spotify I always come back to the fact that Amazon is willing to give away Spotify and a poor man's Netflix solely as an extra enticement to get you to sign up to be a Prime customer.  How do you compete with that without a massive proprietary library to differentiate?  They seem to be doing something to sign up payers but maybe it's just the cheapskate in me that doesn't understand the business case here.

 

 

The free Amazon Music offerings aren’t - I assume - nearly as wide/current as Spotify. I wouldn’t put up with Amazon Music, except that having kids is already a compromised (but still great) experience. I had the paid Amazon Music for the trial period, selection with paid is so much better. So I can definitely see Spotify, Apple Music, or any paid version being desirable.

 

Edit: I guess I should add that my preference is also to listen to good podcasts. And along with audio books, that may or not be headwinds for Spotify.

[glorysk87]

https://adage.com/article/digital/joe-rogan-experience-helps-spotify-win-20-million-deal-omnicom/2266206

[jfan]

Valuation aside..the recurring criticism of Spotify seem to involve two issues (as it pertains to music):

 

1) Music labels control the content, they are consolidated to 3 to 4 major players, and they will not allow Spotify to own their own quality content.

 

2) Spotify has large diversified tech giant competition in the form of Amazon, Youtube Music, and Apple Music (and maybe Pandora/iHeartRadio via Liberty). These competitors either have other cross-selling products and can use Music as a loss leader (Amazon and Apple) or have a giant audience (~1.2 billion via Youtube).

 

With respect to issue #1,

 

Why does the relationship between the Labels and Spotify need to be viewed as a zero-sum game? Was it not less than a decade ago, when music revenues were declining and Spotify/Pandora had to convince the labels that streaming would help generate a new source of

income? Reluctant as they were to jump in until other smaller European labels demonstrated success in this model, I think there are still opportunities to grow the pie collaborative so both parties win. For one, the labels can not be physically everywhere looking for talent. Secondly, data science is just starting to take hold in forecasting successful songs and musicians. https://www.complex.com/music/2019/09/data-changing-music-industry

It is not inconceivable that Spotify could negotiate future better deals or sell data analytics back to the labels in order for them to make talent acquisition and their success much more efficiency.

 

To achieve that Spotify would have to focus on the user experience and become the place where musicians want to aggregate to make it big or get picked up by a label. This probably takes a delicate balancing act between making musicians feel like they are treated fairly and commoditizing their product. Currently, Spotify pays middle of the road $/stream, but artists often make more in total due to Spotify's audience size.

https://www.dittomusic.com/blog/how-much-do-music-streaming-services-pay-musicians

 

This brings this to issue #2, which is in someway interlinked. Amazon and Apple are using music as a means to end (stickiness of their existing members). Google Music is winding down and Google is now dedicating resources to Youtube Music (where Youtube has a much larger audience reach). Amazon and Apple are likely be very happy to fully commoditize the artists and bring the prices down far as possible as they act like pure distributors. Amazon is somewhat limited in the number of countries they operating in (45 vs Spotify 75) with scale primarily in the US, Germany, Japan, and the UK. Apple Music exists in a closed ecosystem and unlikely to open up, which in turns limits their audience. Youtube Music has the greatest potential, large existing Youtube user base to draw from, advertising and data science expertise and thus is likely a big contender (albeit they pay the least in royalty per view - need to verify this as a fact).

 

Spotify being a pure play and device/OS agnostic has an advantage of scaling up faster than Amazon and Apple. Being global also gives them access to a worldwide talent pool that is key to attracting more listeners. Youtube Music, in my opinion, is the best positioned rival and likely take market share from the others over time. I think the music streaming industry in 10 years will consolidate around Spotify, Youtube and the remainder between Apple and Amazon.

 

That is still a lot of people and opportunities to monetize their attention.

 

 

 

 

[fareastwarriors]

Netflix of Audio?

 

https://www.reuters.com/article/us-spotify-vivendi/spotify-strikes-new-deal-with-vivendis-universal-music-group-idUSKCN24N1LG

 

Spotify strikes new deal with Vivendi's Universal Music Group

[kc2610]

https://s22.q4cdn.com/540910603/files/doc_financials/2020/q2/Shareholder-Letter-Q2-2020-FINAL.pdf

 

Total MAUs grew 29% Y/Y to 299 million, which is at the top of our guidance range.

 

As of June 30, global consumption hours have recovered to pre-COVID levels. All regions have fully recovered with the exception of Latin America which is approximately 6% below peak levels prior to the global health crisis.

 

in-car listening at the end of the quarter was less than 10% below pre-COVID levels having recovered from a 50% decline at

the trough in April.

 

At the end of Q2’20 we had 138 million Premium Subscribers globally, up 27% Y/Y, which is at the top end of our guidance

 

Today, 21% of our Total MAUs engage with podcast content, up from 19% of MAUs in Q1 2020, and consumption continues to grow at triple digit rates Y/Y. We see strong MAU growth in podcast content across all regions for Spotify.

 

 

[Broeb22]

Is there ever a point where revenues to the labels from Spotify is so significant that the labels realize oh s&*t we need to have our own offering?

 

You look at Netflix as a case study and their content providers became competitors when they realized if they let Netflix become the only content distributor that they would have less pricing power.

 

Spotify is kind of a distributor, and as distributor from a few (labels) to many (individuals), they bring a little less value than, say a distributor of many suppliers to many customers.

 

My last thought was Spotify has a slightly different long-term financial model than say Netflix. Because they don't own the content and pay a royalty on it, their COGS % won't go down in the same way Netflix' has and will continue to. I don't know their royalties very well, so if the royalties scale better than I'm describing please correct me. But the point is that Netflix will get leverage on all its expenses over time while Spotify will get less leverage on their COGS. It doesn't mean Spotify is a bad company, it just means that the business is missing one lever to increase its profits.

 

[chrispy]

I believe that is why Spotify is pushing into podcasts hard (signing Rogan, etc)

[Spekulatius]

I believe that is why Spotify is pushing into podcasts hard (signing Rogan, etc)

 

I don’t see how signing up expensive big names like Joe Rogan or the Kardashian is going to help them much to reduce content costs.

[kc2610]

Is there ever a point where revenues to the labels from Spotify is so significant that the labels realize oh s&*t we need to have our own offering?

 

You look at Netflix as a case study and their content providers became competitors when they realized if they let Netflix become the only content distributor that they would have less pricing power.

 

Spotify is kind of a distributor, and as distributor from a few (labels) to many (individuals), they bring a little less value than, say a distributor of many suppliers to many customers.

 

My last thought was Spotify has a slightly different long-term financial model than say Netflix. Because they don't own the content and pay a royalty on it, their COGS % won't go down in the same way Netflix' has and will continue to. I don't know their royalties very well, so if the royalties scale better than I'm describing please correct me. But the point is that Netflix will get leverage on all its expenses over time while Spotify will get less leverage on their COGS. It doesn't mean Spotify is a bad company, it just means that the business is missing one lever to increase its profits.

 

Streaming is already >50% of the US music industry revenues and Spotify within that is the largest player. IMO it will be difficult for publishers to have own offerings. This is because, listeners identify music more with artists rather than labels. "I like listening to Coldplay, music from Universal. "

 

https://www.riaa.com/u-s-sales-database/

 

Warner Music's S1 is a good read talking about the importance of streaming to the fortunes of the publishers. Fun fact: The word "stream*" is mentioned 186 times and spotify 32 times.

 

I think podcasts are a way to reduce dependence on labels. As the listener-ship for podcasts increases (in terms of proportion of time spent on podcasts), spotify's leverage over the publishers would increase and the hope is that they would be able to negotiate better Gross Margins.

 

You are correct in your assessment that Netflix and Spotify's business models are not directly comparable. Netflix in that sense is a far superior model compared to Netflix.

[jefke]

Been reading up on Spotify the last couple of months including the last couple of earnings call transcripts. Here's what I think Spotify's vision and thus bull case is:

 

1) The label negotations are (for now?) not about getting better margins there. I think SPOT has peace with the cut they have to pay to the labels.

2) So whats the plan to make money?

- Podcast monetization and basically creating a creating a better way to serve ads (more targeted and thus more valuable)

- 2-sided Marketplace: offer tools to labels and artist to promote themselves.

 

That's basically it. Streaming music by itself is not how they will make (a lot) of money. Streaming music is what makes you stick around on their platform, and then they will try to monetize in ways that doesn't require them to pay a cut to the labels.

 

Some relevant quotes from the Q2 earnings call:

 

MARKETPLACE:

 

Entered a new multi-year global license agreement with Universal Music Group that reflects our shared commitments in growing the industry and supporting artists at all stages of their careers

 

Universal Music Group will leverage Spotify’s marketplace tools for both frontline and catalogue artists to connect them with fans, grow their audiences and better monetize their fan base. And we’ll also work together to develop new products and tools that drive discovery and engagement at a scale that has never before existed.

 

Today, the single largest cost of a label is promotion and marketing. And what’s so exciting to me is that Spotify is the platform where most people are consuming and discovering contents.

...

Universal’s willingness to experiment and go all-in on marketplace. What that means in essence is, Universal has seen the early success and is very excited by it.

 

You should see better results for artists and labels, as well, because they are able to grow their fans a lot better at more efficiently prices than say, other advertising marketplaces or billboards that they’ve traditionally spent them on. And of course, for Spotify means a higher gross margin business

 

PODCASTS

Podcast consumption is still up over a 100% and we are seeing advertisers really wanting to invest in podcasting as a media

 

As you get better at targeting when you have tools like SAI, you are able to actually increase your monetization, increase the relevancy of the ads and increase overall monetization without actually having to increase the overall ad load

 

From a podcasting perspective, the advertising related to podcasting will be a 100% Spotify’s and not shared.

 

GENERAL

Long-term though, just to elevate this discussion, we are very, very bullish still and we are still in the early days on this journey of going after the audio platform of the world and that is still measured in billions of consumers, as we are still relatively early in that cycle and just from a TAM perspective, even today, the radio industry is north of $50 billion. Most of that is advertising, advertising today a small portion of the Spotify’s business, but it will be a much bigger one overall.

 

Value each piece of content based on:

    - what does it do for user growth?

    - how does it improve retention & lower churn?

    - how can we build ads on top of it?

 

So any bear thesis specifically focused on the streaming of music  really misses what's going on at Spotify. They use label music to get you on the platform and stick around, but would prefer it if you listen as much as possible to anything else.

 

 

 

[Broeb22]

https://www.dropbox.com/sh/imqj7tk724xpw7n/AAB1u8DA3Um08fL_jC2IDKuPa?dl=0&preview=Coho+Capital+2020+Q2+Letter.pdf

 

Long-form write-up on Spotify...Coho per usual has some very thorough long-term thoughts to provide.

[kc2610]

https://www.dropbox.com/sh/imqj7tk724xpw7n/AAB1u8DA3Um08fL_jC2IDKuPa?dl=0&preview=Coho+Capital+2020+Q2+Letter.pdf

 

Long-form write-up on Spotify...Coho per usual has some very thorough long-term thoughts to provide.

 

I think this one of the most thoughtful pieces written on Spotify. Thanks for sharing. Would love to read other stuff from Coho. Where might I find them? Thanks.