Author Topic: SPOT - Spotify  (Read 11326 times)

Spekulatius

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Re: SPOT - Spotify
« Reply #10 on: January 05, 2019, 09:38:26 AM »
AMZN music is a contender in the field too. Pretty good selection and it’s included in Prime. It’s plenty good for me. I do agree that Spotify can carve out a place,  but they really need scale. It’s different than video, where Netflix gained scale before the other players did.
« Last Edit: January 05, 2019, 11:58:22 AM by Spekulatius »
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SHDL

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Re: SPOT - Spotify
« Reply #11 on: January 05, 2019, 09:59:05 AM »
A question that I have is why is SIRI able to pull in much better gross margins than SPOT?

I guess one big difference is that SiriusXM produces its own unique content.  That differentiates them from the competition (which helps with pricing power) and gives them very nice operating leverage.  They have music channels too, but as far as I know those are not what make them such a profitable enterprise.

chesko182

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Re: SPOT - Spotify
« Reply #12 on: January 05, 2019, 10:35:37 AM »
A question that I have is why is SIRI able to pull in much better gross margins than SPOT?

I guess one big difference is that SiriusXM produces its own unique content.  That differentiates them from the competition (which helps with pricing power) and gives them very nice operating leverage.  They have music channels too, but as far as I know those are not what make them such a profitable enterprise.

Thanks, I also speculate the agreements for radio plays are very different than streaming.

The labels will see expanding margins as streaming keeps growing and that extra revenue should go straight to their bottom line, while SPOT's will probably stay around breakeven. At some point when they come back to the negotiating table and SPOT has such a massive size they will have to agree to better terms that equitable for both sides. The labels need SPOT as much as SPOT needs the labels, but as time goes on, I see this turning around in SPOT's favor. Very little chance in my mind any major label even threatens to pull-out their content, it's way too much money coming in for them and they have shareholders to respond to as well as a PE sponsor with high leverage (in the case of Warner). 
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chesko182

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Re: SPOT - Spotify
« Reply #13 on: January 05, 2019, 02:14:31 PM »
One more thing, to me it is a little crazy that SIRI has a bigger market cap than SPOT.....I doubt this will be the case 10 years from now.
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dwy000

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Re: SPOT - Spotify
« Reply #14 on: January 05, 2019, 03:21:38 PM »
One more thing, to me it is a little crazy that SIRI has a bigger market cap than SPOT.....I doubt this will be the case 10 years from now.


Why would that be surprising?  SIRI generates about $1.3bn per year in free cash flow.  SPOT is largely breakeven.

Leverage Capabilities

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Re: SPOT - Spotify
« Reply #15 on: January 07, 2019, 08:46:42 AM »
Great post thank you. I've been following the music industry for some time and have become even more interested recently.

SPOT was originally an easy "too hard pile" for me as I have a hard time seeing what it will look like in 10 years but after doing further research I've become more convinced that the twin bear thesis (deep pocketed tech competition hurting overall market penetration+big3 labels hurting margins) is more unlikely to play out, as you point out.

Someone already mentioned this, but I think curated playlists are a largely overseen feature when it comes to switching costs. I think SPOT claims over 30% of overall streams come from this playlists and this is also growing. This makes the switching costs huge for the average user, along with all the rest of the typical reasons (downloaded songs, saved albums/playlists, UI easiness, and social networking features).

A question that I have is why is SIRI able to pull in much better gross margins than SPOT? I believe it's something like 60% vs SPOT's 25%... that difference just seems way to high to me and in the long term SPOT should be able to close that somewhat given the leverage they will have over the labels. It should end up somewhere more balanced where both the labels and SPOT have decent margins but right now it seems to me labels are f*cking SPOT as they are eating the biggest share of the pie and providing almost no value-add, while SPOT is left with nothing even though they provide most of the value-add. This will probably change eventually as they reach a certain amount of scale.

I absolutely urge everyone who is interested in the space to read Matthew Ball's REDEF article on the future of the Music industry. He lays out a very insightful view of how this should playout in the very long term.

https://redef.com/original/16-years-late-13b-short-but-optimistic-where-growth-will-take-the-music-biz

Also this guy is a must follow if you're interested in TMT in general (especially Netflix).

His write-up series' on Netfilx / HBO are phenomenal reads as well

chesko182

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IanBezek

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Re: SPOT - Spotify
« Reply #17 on: January 08, 2019, 12:09:42 PM »
One more thing, to me it is a little crazy that SIRI has a bigger market cap than SPOT.....I doubt this will be the case 10 years from now.


Why would that be surprising?  SIRI generates about $1.3bn per year in free cash flow.  SPOT is largely breakeven.

Yes, however Spotify is the global streaming brand known by most 18-29 year olds across the world (even here in emerging market LatAm where I live). It comes preloaded on phones and gets preferential data treatment from many mobile carriers. Sirius is (as far as I understand it) mostly in the U.S., and mostly aimed at an older demographic that wants an alternative to radio. 10 years from now, Spotify's brand and users will be more desirable and Sirius probably won't be.

dwy000

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Re: SPOT - Spotify
« Reply #18 on: January 08, 2019, 03:04:57 PM »
One more thing, to me it is a little crazy that SIRI has a bigger market cap than SPOT.....I doubt this will be the case 10 years from now.


Why would that be surprising?  SIRI generates about $1.3bn per year in free cash flow.  SPOT is largely breakeven.

Yes, however Spotify is the global streaming brand known by most 18-29 year olds across the world (even here in emerging market LatAm where I live). It comes preloaded on phones and gets preferential data treatment from many mobile carriers. Sirius is (as far as I understand it) mostly in the U.S., and mostly aimed at an older demographic that wants an alternative to radio. 10 years from now, Spotify's brand and users will be more desirable and Sirius probably won't be.

Couldn't you argue that the hope of that brand and user growth is what is already reflected in the $21Bn valuation?  The economics don't and there's a major question as to whether they can monetize those assets.  As both have expanded over the past few years so have losses.  The article from Chesko's post above (thanks! great article) certainly argues that because of the economics of their royalties, user growth doesn't mean profits.  If you lose money on every user, it's tough to make that up with volume.

IanBezek

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Re: SPOT - Spotify
« Reply #19 on: January 09, 2019, 07:24:30 AM »
Sure, the economics aren't there yet. I haven't bought any SPOT yet either. I'm bullish on the business model but the valuation isn't compelling yet. Drop it to $80 or $90 per share and I'll probably start buying. Ultimately the labels need SPOT more than SPOT needs them. The other services are dead on arrival outside the U.S. and so if a label tries to leave SPOT, they're saying goodbye to revenues from most of the world. SPOT will ultimately get enough margin to make a profit, albeit probably a small one. Over time, they'll figure out other ways to monetize their data though, beating Ticketmaster, selling merch, independent artists, whatnot. Once it crosses into accounting + EPS territory, the stock should fly a la Twitter a couple years ago.