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General Category => Investment Ideas => Topic started by: ajc on January 03, 2019, 05:53:02 AM

Title: SPOT - Spotify
Post by: ajc on January 03, 2019, 05:53:02 AM

Overview

Spotify's now my second largest position after Stitch Fix (http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/sfix-stitch-fix/). The thesis is relatively straightforward. Right now the bear perspective is the big 3 labels (Sony, Universal, Warner) account for around 85% of Spotify's streaming plays. That gives the labels so much leverage that Spotify will never be able to raise its margins to the level a world-class billion+ user platform would usually be expected to generate. The other part of the bear view is Apple, Alphabet, and Amazon can use music as a loss-leader while Spotify can't. It's argued this free/low-cost distribution from those businesses means Spotify won't be able to charge enough to generate strong margins without bleeding customers to their competitors. As a result, Spotify only trades at a P/S multiple of 3.5 while Facebook sells at 7.3, Tencent at 8.3, and so on. The market's clearly pricing in a future for Spotify where its revenue is less profitable and therefore of the low quality tech variety.


Management

Management owns around 20% of the business. About 9% belongs to CEO Daniel Ek. They also have super-voting shares. Barry McCarthy, Netflix's CFO for 8 years, has been Spotify CFO since 2014. Ek surrounds himself with smart people who understand the dynamics of tech and music. Sean Parker (ex-Napster CEO) was an early investor and important adviser, Mark Zuckerberg is a friend, the list goes on. Their executive hiring has been top notch.

There's a good profile of Ek in the 'recommended reading' section below, but the short version is he taught himself programming very young, ran a highly successful web development business in school while hiring his classmates, made his first million super early. After he got sick of partying and spending money, he looked around for something he was truly passionate about and could dedicate his career to, which is what led to Spotify being founded.

One other thing: Spotify owns a 9% share of Tencent Music after the companies did a swap deal.


The $100B+ question

My thinking is there are a few questions which'll determine whether Spotify can change the leverage equation in its favor and earn a higher multiple together with whatever growth it can achieve over the next decade.

They are:

- Will the big 3 stay on Spotify long enough for Spotify to flip the script on them (say 5 years or more)?
- Will Spotify keep adding enough users for it to get above the billion+ mark and become the dominant music platform?
- Can Spotify take that 85% of all streaming plays number from the big 3 labels down to say somewhere under 50% of all plays?

I'll try explain how they'll likely achieve those and why that changes the leverage equation to being in Spotify's favor.


Keeping the big 3 with Spotify

First thing is, if Spotify's going to transform into a higher margin company it needs to keep the big 3 around long enough for it to be able to execute on changing the platform so that they become a less significant part of the overall product and streaming mix.

I think a few things matter here:

- Old fashioned greed. Streaming is already a game-changer for labels in terms of revenue (https://www.musicbusinessworldwide.com/global-recorded-music-industry-revenues-grew-8-1-in-2017-to-reach-17-3bn/) and we're still early in the game. For the labels to turn away those Spotify cash flows, it would take a superhuman effort on their part.

- The artists. Even if the labels could somehow reject Spotify and find some other approach, the pushback from their major artists would be big. Spotify currently puts the world's biggest artists in front of almost 200 million people and is slated to enter India (with around 1 billion+ citizens over the age of 18) sometime in the next 6 months. I find it unlikely the biggest artists in the world would settle for less exposure and money from their labels instead of more.

- The competitive price any one label would have to pay if they decided to leave Spotify. Mark Mulligan wrote about this very well (scroll half way down - https://musicindustryblog.wordpress.com/2018/10/26/spotify-may-already-be-too-big-for-the-labels-to-stop-it-competing-with-them/). Basically, the big 3 face a prisoners' dilemma. If Sony or Warner left, Universal would get more exposure, streaming income, and be more attractive to future major artists as a label. Similarly if Universal left, Sony and Warner could increase their earnings, streaming market share, and reputation. In other words, it makes no sense for any label to leave Spotify. This was summed up nicely in a recent FT interview with outgoing Sony/ATV chief Martin Bandier who said "the music business used to be a relationship business but . . . the power has shifted from the heads of record companies to streaming services. Now it’s important to know Daniel Ek [the CEO of Spotify]" (https://www.ft.com/content/1ba3c9c4-03b0-11e9-99df-6183d3002ee1).

Essentially, between the foregone earnings, artist pushback, and lost reputation, the big 3 labels would have to deal with if they left Spotify while it was still popular and growing, there's no reasonable explanation for why any of them would risk such a move.


Getting to a billion+

YouTube (1.5 billion+ users) is currently the most popular music streaming service in the world followed by Tencent Music (850 million+), NetEase (400 million+), then Spotify (190 million). If Spotify is going to have noticeable leverage in the future, I think it probably needs to get up to the billion user mark in order to make it essential for artists and consumers.

It's worth noting Tencent and NetEase are mainly Chinese. This doesn't mean they can't expand globally (see what TikTok are doing - https://techcrunch.com/2018/11/02/tiktok-surpassed-facebook-instagram-snapchat-youtube-in-downloads-last-month/), but my view tends to be these businesses will mostly serve China, ASEAN, etc. For Spotify, that leaves NAFTA, the EU, S America, Africa, the Middle East, India, and 1 or 2 others. More than enough territories to get over a billion MAU's.

For now I think the traditional 'western-style' music pure play competition is between YouTube and Spotify. In other words, for the majority of people those are the two choices over the coming decade in terms of an app download solely for music and audio purposes. Keep in mind though that YouTube listeners are basically all free accounts and YouTube Music (their paid streaming service) has been kind of a bust so far (see https://www.digitalmusicnews.com/2018/05/28/youtube-music-missing-in-action/ and https://www.engadget.com/2018/08/01/youtube-music-new-features/).

Apple Music doesn't seem like a real worldwide threat (https://www.musicbusinessworldwide.com/apple-music-tops-56m-subscribers-up-6m-in-the-past-six-months/) and Amazon can't seem to really match Spotify either (https://www.musicbusinessworldwide.com/will-amazon-and-apple-music-catch-spotifys-subscriber-base-by-the-end-of-2018/). Obviously, Spotify can't afford to let up but I think in the race to challenge YouTube they're definitely the best bet given where they are and what their trajectory says. Their upcoming India entry (https://www.forbes.com/sites/richardwindsoreurope/2018/11/27/spotify-in-india-will-be-99-9-free-rather-than-9-99-a-month) and recent deal with Samsung (https://www.theverge.com/2018/8/9/17671162/samsung-spotify-bixby-home-speaker-hardware-devices-galaxy), seem to confirm that.

I think other important factors for getting to one billion users for Spotify will be finding a way to make their service the most economical with data usage. Especially in the developing world, this is crucial. Data tends to cost money and money is scarce. Having a service that chews up less data per song than your competitors will be a big advantage overall. That's clearly an engineering and compression problem, so Spotify would ideally lead the industry in that area. There is some evidence that Spotify might already have an edge here (compare these two articles - https://www.finder.com.au/music-streaming-data-usage and https://www.androidauthority.com/spotify-data-usage-918265/). Those articles compare different territories so I can't be sure, but I feel reasonably confident in saying the Spotify 'low quality' setting is for the developing world and gives it an advantage there (especially over YouTube and its need to stream video that's more data heavy).

Finally, having a clean, intuitive interface that makes sense to the average user and is easy to manage will be a differentiator. In my experience, Spotify is already the best offering on this score but they'll have to keep up their minimalist, easy-to-use reputation in this area in order to keep user friction low.

Generally, I think based on their user growth trajectory, their low data usage offerings, and their clean, functional interface, Spotify is doing all the right things to become a billion+ user platform. I also think there's a very good chance it will take over from YouTube as the most widely used and heavily streamed music platform because it offers a far more targeted market for musicians and a much better overall value proposition for users in the developing world. Furthermore, at least on official artist pages, YouTube does not currently have that many more streams per song than Spotify. Both Post Malone and Drake got more Spotify official streams than YouTube ones this year, so I think the YouTube lead might not be as rock-solid as it appears.


Cutting the big 3 down to size

That's a tongue-in-cheek way to say it, since the big 3 labels are important to Spotify's future (together with their back catalogues). Spotify does however need to limit their influence noticeably over time. There are three main things Spotify is doing to change the dynamics substantially in their favor here.

The first thing is Spotify is offering artists tools and support to bypass the labels completely, upload directly, and manage their image and portfolio. Like YouTube and Soundcloud did, Spotify's making a useful DIY experience for creators (http://routenote.com/blog/the-8-powers-spotify-for-artists-gave-to-creators-in-the-last-year/) and paying them a bigger percentage than the labels (https://www.theverge.com/2018/9/20/17879840/spotify-artist-direct-upload-independent-music).

Take for example the late XXXTentacion, a Soundcloud native, who became one of the world's biggest music stars. He took 5 years to get 16 million YouTube subscribers compared to Drake's 17 million. XXXTentacion also has YouTube views for his top 10 videos that compare very well to Drake's numbers. On Spotify, XXXTentacion is not far behind Drake in total streams for their top 10 tracks and well ahead of the Beatles, Michael Jackson, and Jay-Z.
Outside of music and on the topic of YouTube natives, Pewdiepie has 80 million subscribers and 19 billion total views (https://en.wikipedia.org/wiki/List_of_most-viewed_YouTube_channels). That's ahead of Justin Bieber, Taylor Swift, Shakira, etc. Pewdiepie only got to his first million subscribers in 2012 (https://en.wikipedia.org/wiki/PewDiePie).

That means within about 5 to 7 years Spotify will potentially be at, or right near, the forefront of new artist development and distribution globally. They'd suddenly become the hot new place where musicians make their careers and users discover all the interesting new ones. The equation for labels and existing artists becomes more 'can we afford not to be on the hottest, most creative, distribution platform?'. Add direct artist licensing (https://www.hypebot.com/hypebot/2018/09/spotifys-risky-play-direct-artist-licensing.html) and Spotify is laying the necessary groundwork.

The second thing Spotify's doing is bringing in new labels from big territories and diluting the overall stream percentage controlled by the big 3 labels. T-Series is one of India's biggest labels and Spotify has signed them up (https://www.hindustantimes.com/tech/spotify-ties-up-with-t-series-to-launch-in-india-within-next-6-months/story-PA86NGz08ftrfEJoJx1HUN.html). T-Series is also YouTube's most watched channel with 78 million subscribers and 57 billion streams. Agreements like this make the big 3 global labels a smaller piece of the pie and therefore less able to push Spotify around. Spotify can do this in huge markets like Indonesia, Brazil, Pakistan, Nigeria, Bangladesh, Mexico, Ethiopia, etc, over the next decade and lower the overall percentage of streams attributable to Sony, Universal, and Warner.

The final thing Spotify is doing to lessen the role of the big 3 labels is to expand into other audio offerings. For now, Spotify had expanded into podcasts. Other clear choices to my mind are audiobooks, talk radio, regular radio, and live sports commentary. Global recorded music industry revenues in 2017 (including stuff like streaming) were $17B and growing at 8% (https://www.musicbusinessworldwide.com/global-recorded-music-industry-revenues-grew-8-1-in-2017-to-reach-17-3bn/). Podcasting advertising revenues are expected to be $1.6B by 2022 growing at 30%, while total revenues for the global radio industry are at a sizeable $45B (https://www.strategy-business.com/article/The-Podcasting-Revenue-Boom-Has-Started?gko=40bef). The global audiobook industry is also a multi-billion dollar market.

To sum up, Spotify is doing what it needs to heavily lessen the influence of Universal, Sony, and Warner, as a percentage of their total streams over the next 5 to 10 years. Firstly they're offering artists tools and deals to work through Spotify directly and bypass the labels. This should bear fruit within 7 years. Spotify's also bringing in major labels from big territories like India to minimize the overall power of Universal, Sony, and Warner. Another decade of expansion into the rest of the world will mean they rely a lot less on the big 3. Finally, Spotify's expansion into podcasts - and hopefully audiobooks or something similar - is also going to have an impact in getting the big 3 down to a manageable size.


Conclusion

Spotify's a sensible long-term investment at these prices and is doing what's necessary to become a, and more likely 'the', pre-eminent global music platform. It's also using an approach designed to minimize the leverage of the big 3 labels to the point where they really will need to be on Spotify in order to be relevant and keep their artists exposed.

Further, if you take the fact that Spotify is making itself the most user-friendly platform for musicians and will, I think, become ground zero for artist creativity, discovery, and promotion, that also implies Amazon and YouTube will eventually become distribution channels more than anything else. Spotify on the other hand will not just have a similarly large distribution, but will couple that with the greatest musical creative hub, artist ecosystem, and discovery platform, on the planet. Being the destination where all hot new acts want to be posted and where all young people want to engage in music discovery will make Spotify the most exclusive and premium brand of its kind, giving it the leverage it needs to charge higher prices, negotiate better margins, and so on.


Recommended reading

How Spotify could become worth $300B from the LT3000 investment blog (scroll down) - https://lt3000.blogspot.com/2018/05/new-valuation-metrics-for-tech.html

Mark Mulligan's music industry blog where he discusses competitive dynamics, trends, etc (scroll down for some Spotify insights) - https://musicindustryblog.wordpress.com/

In-depth Fast Company profile on CEO Daniel Ek - https://www.fastcompany.com/90213545/exclusive-spotify-ceo-daniel-ek-on-apple-facebook-netflix-and-the-future-of-music


Title: Re: SPOT - Spotify
Post by: Liberty on January 03, 2019, 06:29:31 AM
Thanks for these writeups, you obviously put a lot of work into them and they are a great addition to the board (even when about companies on which I have no opinion).
Title: Re: SPOT - Spotify
Post by: valueinvestor on January 03, 2019, 07:00:04 AM
Thanks for these writeups, you obviously put a lot of work into them and they are a great addition to the board (even when about companies on which I have no opinion).

Couldn't have said it better.
Title: Re: SPOT - Spotify
Post by: KJP on January 03, 2019, 07:21:49 AM
Thanks for these writeups, you obviously put a lot of work into them and they are a great addition to the board (even when about companies on which I have no opinion).

Couldn't have said it better.

+1
Title: Re: SPOT - Spotify
Post by: dwy000 on January 03, 2019, 09:00:28 AM
+1

Greg Maffei had some great comments a while back when talking about the music streaming services and why they hadn't bought in (this was before Pandora purchase).  He basically said they didn't see a long term business model because all of the streaming providers give consumers exactly the same product - the only differentiation was user interface and price so it was basically a race to the bottom and when you're in that race against companies willing to subsidize losses for a very long time without noticing (i.e. Apple, Amazon, Google) it was hard to see where value would be created.

I see this a little like Netflix.  For the longest time it was just a consolidator and distributor of product, ultimately at the mercy of those creating the product.  But when it realized there was no future in moat-less distribution and they needed differentiation to survive long term,  they started to curate their own product.  Much like Sirius has on the radio side.

Basically for this to work you need to either have differentiated product or the lowest cost of production (i.e. music rights).  Not sure where that will fall out for Spotify but there are a ton of competitors with deep pockets willing to use this as a loss leader.  I'd wait until the long term model plays out a bit more to pick a winner.  But that's just me....


Title: Re: SPOT - Spotify
Post by: Jurgis on January 03, 2019, 11:13:02 AM
+1

Greg Maffei had some great comments a while back when talking about the music streaming services and why they hadn't bought in (this was before Pandora purchase).  He basically said they didn't see a long term business model because all of the streaming providers give consumers exactly the same product - the only differentiation was user interface and price so it was basically a race to the bottom and when you're in that race against companies willing to subsidize losses for a very long time without noticing (i.e. Apple, Amazon, Google) it was hard to see where value would be created.

I see this a little like Netflix.  For the longest time it was just a consolidator and distributor of product, ultimately at the mercy of those creating the product.  But when it realized there was no future in moat-less distribution and they needed differentiation to survive long term,  they started to curate their own product.  Much like Sirius has on the radio side.

Basically for this to work you need to either have differentiated product or the lowest cost of production (i.e. music rights).  Not sure where that will fall out for Spotify but there are a ton of competitors with deep pockets willing to use this as a loss leader.  I'd wait until the long term model plays out a bit more to pick a winner.  But that's just me....

I think I disagree somewhat re: Netflix. I think I posted that I wanted to cancel Netflix because we have Amazon Prime and Amazon Prime has been improving and hosting a lot of similar/same content as Netflix. My wife said "no way". And not because she watches Netflix-exclusive or Netflix-produced content. I think it's mostly based on familiarity, UI, long existing watch list. Maybe somewhat based on content that is known to be on Netflix, but not necessarily exclusive: she knows it's on Netflix and she does not want to search/check if it's on Amazon (or will it ever be on Amazon).

So IMO if service has a huge membership like Netflix has, they may have stickiness and moat based on existing relationship with viewers/subscribers. There is a pain point of moving to another service even if that other service may have some of the same content. And Netflix can even raise price and not lose subscribers like that.

Whether this applies to Spotify, I don't know. I'd say that they need to grow a number of users a lot for this to apply, which is one of the points of OP.
It also may be different for music services if the content overlap is very big: i.e. if every service has everything. In movies, nobody has everything. Netflix doesn't, Amazon doesn't. And the availability changes all the time, which BTW I think psychologically makes people more tied to the service, since there is this thought "if I cancel, I may miss movies/shows that might be there next month".
Title: Re: SPOT - Spotify
Post by: Leverage Capabilities on January 03, 2019, 11:48:20 AM
Great write up. Saw this below article in FT about their successes in LatAm / global expansion plans

https://www.ft.com/content/2b1b317a-f87b-11e8-8b7c-6fa24bd5409c (https://www.ft.com/content/2b1b317a-f87b-11e8-8b7c-6fa24bd5409c) 
Title: Re: SPOT - Spotify
Post by: Leverage Capabilities on January 03, 2019, 12:02:09 PM
+1

Greg Maffei had some great comments a while back when talking about the music streaming services and why they hadn't bought in (this was before Pandora purchase).  He basically said they didn't see a long term business model because all of the streaming providers give consumers exactly the same product - the only differentiation was user interface and price so it was basically a race to the bottom and when you're in that race against companies willing to subsidize losses for a very long time without noticing (i.e. Apple, Amazon, Google) it was hard to see where value would be created.

I see this a little like Netflix.  For the longest time it was just a consolidator and distributor of product, ultimately at the mercy of those creating the product.  But when it realized there was no future in moat-less distribution and they needed differentiation to survive long term,  they started to curate their own product.  Much like Sirius has on the radio side.

Basically for this to work you need to either have differentiated product or the lowest cost of production (i.e. music rights).  Not sure where that will fall out for Spotify but there are a ton of competitors with deep pockets willing to use this as a loss leader.  I'd wait until the long term model plays out a bit more to pick a winner.  But that's just me....

I think I disagree somewhat re: Netflix. I think I posted that I wanted to cancel Netflix because we have Amazon Prime and Amazon Prime has been improving and hosting a lot of similar/same content as Netflix. My wife said "no way". And not because she watches Netflix-exclusive or Netflix-produced content. I think it's mostly based on familiarity, UI, long existing watch list. Maybe somewhat based on content that is known to be on Netflix, but not necessarily exclusive: she knows it's on Netflix and she does not want to search/check if it's on Amazon (or will it ever be on Amazon).

So IMO if service has a huge membership like Netflix has, they may have stickiness and moat based on existing relationship with viewers/subscribers. There is a pain point of moving to another service even if that other service may have some of the same content. And Netflix can even raise price and not lose subscribers like that.

Whether this applies to Spotify, I don't know. I'd say that they need to grow a number of users a lot for this to apply, which is one of the points of OP.
It also may be different for music services if the content overlap is very big: i.e. if every service has everything. In movies, nobody has everything. Netflix doesn't, Amazon doesn't. And the availability changes all the time, which BTW I think psychologically makes people more tied to the service, since there is this thought "if I cancel, I may miss movies/shows that might be there next month".

I think there may be a few good parallels between NFLX / SPOT here for existing users. A year or so, I considered making the switch from Spotify to Apple music but really didn't want to deal with recreating playlists (I don't believe there is a viable way to transfer between platforms) or redownloading songs i had already saved for offline use. Additionally, the Spotify-curated playlists have become widely popular and switching platforms will force users to try and find similar curations all over again. While this stickiness can also apply to Apple / AMZN, given Spotify's current lead in user base, i feel like its much more to their advantage. 

IMO the UI for SPOT is way simpler / cleaner than Apple music and i find it significantly easier to find new songs / artists (I tried out Apple w/ a 1 mo. free trial). I also have heard from a number of my friends that the "radio" feature on Spotify is better, although i have not used it much myself.
Title: Re: SPOT - Spotify
Post by: dwy000 on January 03, 2019, 12:41:09 PM
+1

Greg Maffei had some great comments a while back when talking about the music streaming services and why they hadn't bought in (this was before Pandora purchase).  He basically said they didn't see a long term business model because all of the streaming providers give consumers exactly the same product - the only differentiation was user interface and price so it was basically a race to the bottom and when you're in that race against companies willing to subsidize losses for a very long time without noticing (i.e. Apple, Amazon, Google) it was hard to see where value would be created.

I see this a little like Netflix.  For the longest time it was just a consolidator and distributor of product, ultimately at the mercy of those creating the product.  But when it realized there was no future in moat-less distribution and they needed differentiation to survive long term,  they started to curate their own product.  Much like Sirius has on the radio side.

Basically for this to work you need to either have differentiated product or the lowest cost of production (i.e. music rights).  Not sure where that will fall out for Spotify but there are a ton of competitors with deep pockets willing to use this as a loss leader.  I'd wait until the long term model plays out a bit more to pick a winner.  But that's just me....

I think I disagree somewhat re: Netflix. I think I posted that I wanted to cancel Netflix because we have Amazon Prime and Amazon Prime has been improving and hosting a lot of similar/same content as Netflix. My wife said "no way". And not because she watches Netflix-exclusive or Netflix-produced content. I think it's mostly based on familiarity, UI, long existing watch list. Maybe somewhat based on content that is known to be on Netflix, but not necessarily exclusive: she knows it's on Netflix and she does not want to search/check if it's on Amazon (or will it ever be on Amazon).

So IMO if service has a huge membership like Netflix has, they may have stickiness and moat based on existing relationship with viewers/subscribers. There is a pain point of moving to another service even if that other service may have some of the same content. And Netflix can even raise price and not lose subscribers like that.

Whether this applies to Spotify, I don't know. I'd say that they need to grow a number of users a lot for this to apply, which is one of the points of OP.
It also may be different for music services if the content overlap is very big: i.e. if every service has everything. In movies, nobody has everything. Netflix doesn't, Amazon doesn't. And the availability changes all the time, which BTW I think psychologically makes people more tied to the service, since there is this thought "if I cancel, I may miss movies/shows that might be there next month".

That's a good point.  There's definitely stickiness to anything that isn't "flip a switch" to change.  That being said, there's always a price point that makes it worthwhile and it doesn't apply to new users.  When looking for a moat or differentiation though I'm not sure I'd put too much emphasis on people's laziness (although given how lazy most people are that might be an awesome moat!).
Title: Re: SPOT - Spotify
Post by: chesko182 on January 05, 2019, 09:29:37 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).
Title: Re: SPOT - Spotify
Post by: Spekulatius 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.
Title: Re: SPOT - Spotify
Post by: SHDL 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.
Title: Re: SPOT - Spotify
Post by: chesko182 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). 
Title: Re: SPOT - Spotify
Post by: chesko182 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.
Title: Re: SPOT - Spotify
Post by: dwy000 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.
Title: Re: SPOT - Spotify
Post by: Leverage Capabilities 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
Title: Re: SPOT - Spotify
Post by: chesko182 on January 07, 2019, 01:41:33 PM
Very interesting piece of history...  Sean Parker emails Daniel Ek in 2009

https://www.scribd.com/doc/67465758/Sean-Parker-s-Email-to-Spotify-s-Daniel-Ek?irgwc=1&content=10079&campaign=Skimbit%2C%20Ltd.&ad_group=35871X943606X7c75052d48c2c5e91672d1cdb54ab22f&keyword=ft750noi&source=impactradius&medium=affiliate
Title: Re: SPOT - Spotify
Post by: IanBezek 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.
Title: Re: SPOT - Spotify
Post by: dwy000 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.
Title: Re: SPOT - Spotify
Post by: IanBezek 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.
Title: Re: SPOT - Spotify
Post by: rogermunibond on January 09, 2019, 11:48:23 AM
I wasn't a believer in SPOT until I started using it.  I pay $10 month for the service now.  Curation plus depth of catalog for what I'm seeking - mostly dance music.

Works much better than Amazon Music, Apple, or Pandora.
Title: Re: SPOT - Spotify
Post by: Ahab on January 09, 2019, 12:29:49 PM
Ditto on really enjoying Spotify. I've paid for it for 5 years running, my oldest digital subscription, haha.
On an investment basis, the question remains if Spotify can overcome the likes of Apple Music and Youtube (and their giant backers). The economics aren't great now, but if Spotify maintains share, it should benefit from larger shifts in the music industry and eventually improve its margin profile.
Title: Re: SPOT - Spotify
Post by: rogermunibond on January 09, 2019, 12:36:13 PM
Honestly I don't think their economics improve.  Mostly because their competitors are giants and have money to throw at investing in subs and services.  And their suppliers are a tight oligopoly of basically 3-4 giants and then a bunch of independents.

Spotify is trying to discover/produce their own artists.  So too for Apple Music, but I think that's a tougher game than for video content, which is/was Netflix's strategy.
Title: Re: SPOT - Spotify
Post by: Ahab on January 09, 2019, 12:42:03 PM
I totally agree it's a tougher game than Netflix. I think the bull case has to rely on Spotify becoming an aggregator in the long run and achieving more favorable revenue sharing arrangements as opposed to the status quo.
Title: Re: SPOT - Spotify
Post by: chesko182 on January 12, 2019, 01:57:42 PM
I thought this was a very well-thought-out comment from the SPOT VIC post, full credits to user WinBrun:

(he's responding to a Reply that says: Thoughts on this? https://www.musicbusinessworldwide.com/spotify-is-on-a-road-to-collision-with-the-record-industry-heres-why/ )

"What is the real alternative to the labels working constructively with Spotify over the long-term to maximize the value of their catalogs by driving global adoption of streaming? It seems to me that the alternatives are potentially worse---i.e. risk concentrating market power in the hands of Apple (and the other two companies that could have a global presence-Amazon-Google should not make them more comfortable). There is always tension in supplier-retailer relationships-----particularly when it is new----but over time, most suppliers benefit from maximum distribution---and the retailer that builds the most scale will offer maximum distribution. It seems like Spot has a good chance to be the largest retailer of streaming music services, or one of the scale companies, due to its head-start, brand, technology, and focus. Because this market is going to be enormous and will grow for a long-time, that is a good place to be.

It seems unlikely that the labels are going to be able to puppeteer an industry structure that is most hospitable to their needs and economics by playing hardball with Spotify because they think Spot has a better valuation than they do or can afford to make margin concessions. I guess its possible that this industry structure could evolve into one with a lot of supplier power, such as Nike versus the retailers--but that assumes that retail distribution of streaming audio services is effectively a commodity that is easily substitutable. That seems to be the essential issue here: if you believe that streaming music services are effectively a commodity because they basically all have the same content--then over time----that is probably not good for Spot. Of course, if you take that outcome to its logical conclusion, then the low-cost retailer is going to enjoy the most market power--and this could become a Wal-Mart/CPG model with Amazon or Apple playing the role of Wal-Mart (the services will just get bundled with other products from one of the tech giants). That is arguably worse for the labels than a healthy and profitable spotify serving as a check on the tech giants who are only interested in music as means to monetize other larger businesses (consumer products/Amazon Prime).

On the other hand, if you believe that the merchandising, presentation, and distribution of an audio service can meaningfully differentiate the quality of the consumer experience and can engender consumer loyalty over time--then the labels are going to be forced to do business with the best retailer on terms that suit that retailer. My feeling is that streaming is not going to be a commodity service--and that people are going to increasingly value the quality of the curation, discovery, and social sharing components of music in a way that is going to separate spot from its competitors. On something that is as personal as music that people are deeply passionate about--I believe there will be a huge base of customers that choose the best service for their needs--not the service that comes bundled with a smart home device or the service that is a few dollars cheaper."
Title: Re: SPOT - Spotify
Post by: ajc on January 19, 2019, 05:58:23 AM

Spotify is making a big push for the in-car market, plus they inadvertently revealed their India launch might happen as soon as the end of this month.

https://www.musicbusinessworldwide.com/spotify-is-making-voice-controlled-hardware-for-the-car-and-could-launch-in-india-on-january-31/


Title: Re: SPOT - Spotify
Post by: Spekulatius on January 30, 2019, 07:23:30 PM
Malone’s  XM Sirius now ventures into the streaming music space by taking out Pandora:
https://finance.yahoo.com/news/pandora-stockholders-approve-transaction-siriusxm-210500114.html (https://finance.yahoo.com/news/pandora-stockholders-approve-transaction-siriusxm-210500114.html)
Title: Re: SPOT - Spotify
Post by: chesko182 on February 02, 2019, 03:47:17 PM
Another move closer into content creation, straight from the Netflix playbook...

https://www.fastcompany.com/90301291/spotify-in-talks-to-buy-podcasting-giant-gimlet-media

Wonder what they will do with that content knowing they own the most valuable music platform real estate? ???

Interesting that the company also produces video
Title: Re: SPOT - Spotify
Post by: Leverage Capabilities on February 04, 2019, 08:41:15 AM
Another move closer into content creation, straight from the Netflix playbook...

https://www.fastcompany.com/90301291/spotify-in-talks-to-buy-podcasting-giant-gimlet-media

Wonder what they will do with that content knowing they own the most valuable music platform real estate? ???

Interesting that the company also produces video

I think a separate podcasting app probably makes the most sense. It's obviously a give / take between keeping the existing music platform as-is and being able to integrate / push a higher margin product. I'm sure they could set it up where you "swap" into the Spotify Podcasts app from the music app, similar to how the Facebook app will automatically open messenger.

Title: Re: SPOT - Spotify
Post by: ajc on February 06, 2019, 03:50:20 AM

Q4 highlights:


- OI, NI, FCF all simultaneously positive for 1st time in company history
- Total MAUs up 29% YoY
- Premium subscribers up 36% YoY
- Total revenue up 30% YoY
- Gross margin up to 26.7%
- Net cash flows from operating activities up 58% YoY
- 1.8B euros in cash and short-term investments


https://s22.q4cdn.com/540910603/files/doc_financials/quarterly/2018/q4/Shareholder-Letter-Q4-2018.pdf


Title: Re: SPOT - Spotify
Post by: ajc on February 06, 2019, 04:46:22 AM


Q4 highlights:


- OI, NI, FCF all simultaneously positive for 1st time in company history
- Total MAUs up 29% YoY
- Premium subscribers up 36% YoY
- Total revenue up 30% YoY
- Gross margin up to 26.7%
- Net cash flows from operating activities up 58% YoY
- 1.8B euros in cash and short-term investments


https://s22.q4cdn.com/540910603/files/doc_financials/quarterly/2018/q4/Shareholder-Letter-Q4-2018.pdf




Also, Ek's post on the Gimlet and Anchor podcast acquisitions is a good read.
Contains interesting insights about user behavior and how Spotify views the overall industry.

https://newsroom.spotify.com/2019-02-06/audio-first/


Title: Re: SPOT - Spotify
Post by: Spekulatius on February 06, 2019, 07:37:22 AM
WHO is EK? I get the idea that SPOT could become a nice business some day, but ~$25B is a lot to pay for ”could”. I get the idea to buy FB and GOOG for 20 x earnings. I’d rather deal with crappy headlines than crappy financials. SPOT is parked on my watch list right now.
Title: Re: SPOT - Spotify
Post by: glorysk87 on February 06, 2019, 10:39:05 AM
WHO is EK?

Can't tell if you're serious or not, but it's Daniel Ek the co-founder and CEO of Spotify
Title: Re: SPOT - Spotify
Post by: Spekulatius on February 06, 2019, 04:00:02 PM
WHO is EK?

Can't tell if you're serious or not, but it's Daniel Ek the co-founder and CEO of Spotify
‍‍‍
Ouch, thanks I missed that. Thought EK is a shorthand for something, but of course it’s a Swedish name.
Title: Re: SPOT - Spotify
Post by: Liberty on February 07, 2019, 08:34:35 AM
https://stratechery.com/2019/spotifys-podcast-aggregation-play/
Title: Re: SPOT - Spotify
Post by: chesko182 on February 07, 2019, 09:04:52 AM
A great post, as usual.

A not-so-crazy-idea now (pure speculating): Spotify buys a meditation-app (or develops its own...).

Fits the audio company strategy, fixed-cost structure, lowers churn, increases LTV etc.

Anyone seen anything related to reactions of the labels to this new strategy?
Title: Re: SPOT - Spotify
Post by: Jurgis on February 07, 2019, 12:03:40 PM
I guess $1M questions are:

- How big is the podcast market going forward? Ek said going to 20%+ of Spotify listening. Is that reasonable and achievable?
- What is the probability of Spotify capturing that ??% of total podcasting that would map to 20%+ of Spotify listening?
- Assuming they get to 20%+ of Spotify listening. Is that enough to drive monetization/profits assuming no improvement on music side?
- Assuming they get to 20%+ of Spotify listening, will that improve Spotify's position vs music labels/artists and music side of business overall?

Let me throw out a simple silly model: assume current annual revenue $7B, podcasting adding 20% revenue ($1.4B), all that flowing to income/CF at 100% margin, you have $1.4B income/CF at $25B market cap - looks cheapish. Especially since regular revenue may grow double digits itself. The optimistic parts of this model are 20% rev addition and 100% margin though. Assuming 50% margin, the valuation becomes less attractive.

With 207M MAUs, it's possibly somewhat realistic to add 20-40M MAUs if they can grab a large podcast slice?
Title: Re: SPOT - Spotify
Post by: Jurgis on February 20, 2019, 12:18:57 PM
Mostly questions: https://www.rollingstone.com/music/music-features/five-things-spotify-needs-to-fix-in-2019-794853/
Title: Re: SPOT - Spotify
Post by: voyager on February 22, 2019, 08:51:16 AM
I have a little bit of knowledge here in the podcasting space and can offer a few thoughts.

1) For info on the industry check out Edison's Share of Ear report.  They also do podcast specific research as well.  It's very good and used by the industry.  Long story short, podcasting is growing fast, albeit the industry is still small ~$300 million doesn't monetize super well yet, and is a big opportunity for Spotify.
2) What Spotify is really good at is discovery... This is a skill that is much needed with podcasts.  They think one way to do it is to have exclusive content, although one should expect them to have outside content as well. 
3) The unit economics are probably better than music for podcasting since there are less middle men.
4) Strategically, it's a way for them to have an edge over Apple, who is their big competitor.  Additionally, people don't use streaming very much when in the car.  Podcasts are really catching on in the car and if Spotify can leverage that to get more people to use their app in the car - even by a couple percent - that's a huge value to them. 

The Stratechery article is great as well. 
Title: Re: SPOT - Spotify
Post by: ajc on February 27, 2019, 05:10:55 AM

Spotify has launched in India (https://techcrunch.com/2019/02/26/spotify-launches-in-india/).

Won't help their ARPU numbers, but in all likelihood will provide a strong boost to their MAU stats judging from the response on Twitter India yesterday.
Anyway I think they're focused on the right thing for now, which is user scale over revenue.

Back to Twitter India... people seemed unanimously crazy about the launch news as I saw it develop, and a few were openly dissing Apple, JioSaavn, and Gaana, saying they couldn't wait to delete those accounts.

Clearly it's too early to tell what market share Spotify will grab, but I think it's safe to say the early signs look relatively promising.


Title: Re: SPOT - Spotify
Post by: ajc on February 28, 2019, 06:34:16 AM

Spotify CFO, Barry McCarthy, took part in a fireside chat at the Morgan Stanley Tech, Media, and Telecom Conference on February 26th, 2019.
He discussed their potential total addressable market, India, current/future margin structure, and their relationship with the labels, as well as many other things.
The conversation contains numerous insights around how Spotify views their own business, and also how they see the overall audio industry.

https://investors.spotify.com/events/events-calendar/event-details/2019/Morgan-Stanley-TMT-Conference-2019/default.aspx


Title: Re: SPOT - Spotify
Post by: Liberty on March 15, 2019, 01:30:46 AM
Apple response to Spotify:

https://www.apple.com/newsroom/2019/03/addressing-spotifys-claims/
Title: Re: SPOT - Spotify
Post by: Spekulatius on March 15, 2019, 04:08:20 AM
Apple response to Spotify:

https://www.apple.com/newsroom/2019/03/addressing-spotifys-claims/

So a market place for a paid subscription service accuses the other market place of charging for access. Makes sense. :o
Title: Re: SPOT - Spotify
Post by: rogermunibond on March 15, 2019, 07:20:39 AM
Spotify is partnering with Hulu to give Premium subscribers a free Hulu ad-supported plan as part of their package.  Interesting idea.  Billing is still through Spotify but now Hulu gets a bump up in subs.

It seems like decent idea to pair music with video content in a bundle.
Title: Re: SPOT - Spotify
Post by: Jurgis on March 15, 2019, 07:52:53 AM
Apple response to Spotify:

https://www.apple.com/newsroom/2019/03/addressing-spotifys-claims/ (https://www.apple.com/newsroom/2019/03/addressing-spotifys-claims/)

So a market place for a paid subscription service accuses the other market place of charging for access. Makes sense. :o

Yo homies, how 'bout battle rap this out.
Title: Re: SPOT - Spotify
Post by: Spekulatius on April 16, 2019, 04:44:15 PM
Freakonomics podcast about Spotify, the music industry with the founder Daniel Ek:
http://freakonomics.com/podcast/spotify/ (http://freakonomics.com/podcast/spotify/)

I don’t own this, but I am impressed by the founder. Very much focused on user experience and very down to earth. Listening to the podcast is time well spent if you are interested in SPOT or any other company in this sector.
Title: Re: SPOT - Spotify
Post by: Liberty on May 14, 2019, 07:26:56 AM
New writeup about SIRI and SPOT by Scuttleblurb (subscription required):

https://www.scuttleblurb.com/sirius-pandora-siri-spotify-spot-long-term-relevance-long-term-dominance/
Title: Re: SPOT - Spotify
Post by: chesko182 on May 15, 2019, 05:36:25 AM
would anyone care two share the two cents on Scuttleblurb's post?
Title: Re: SPOT - Spotify
Post by: ajc on May 21, 2019, 02:28:29 PM

Sold my stake for a small gain a week or two back (after buying in at $119), though I still think management is very good, the product and brand are strong, and this will likely be a worthwhile investment over the next decade.

However, in my original analysis I believe I underestimated how competitive the global space would be for the next few years. My guess is it'll take longer than I initially figured for the industry winners and losers to shake out, so for a reasonable while I imagine the returns will be steady rather than turbo charged.

Holding Stitch Fix, Facebook, and Uber, together with bucket loads of cash, instead.


Title: Re: SPOT - Spotify
Post by: chesko182 on June 28, 2019, 05:13:20 AM
A recent article, presentation and twitter thread on SPOT

Investing in the Podcast Ecosystem in 2019 - Andressen Howowitz
https://a16z.com/2019/05/23/podcast-ecosystem-investing-2019/

ValueX Vail Presentation - DA Davidson
https://valuexvail.com/presentations/#Spotify-Technology-SA-SPOT

Bluegrass Capital highlighting Scuttleblurb's article on SPOT (found this the most insightful)
https://twitter.com/BluegrassCap/status/1144314122508668929
Title: Re: SPOT - Spotify
Post by: Liberty on July 11, 2019, 07:36:30 AM
https://traviswiedower.com/2019/07/11/spotifys-moats-management-and-unit-economics/
Title: Re: SPOT - Spotify
Post by: chesko182 on August 06, 2019, 03:43:34 AM
this is problably good for the industry as it may generate more cooperation between the labels and streaming platforms (Tencent owns 58% of Tencent music, which in turn did an equity swap with SPOT where they each own ~10% of each other) There's a lot of headlines around labels seeing distributors as their enemies but I don't think that's actually the case.

It may bring more discipline to the industry and I think it makes sense for them to do this.

https://www.wsj.com/articles/tencent-in-talks-to-buy-stake-in-universal-music-group-11565078272?mod=hp_lead_pos5
Title: Re: SPOT - Spotify
Post by: Spekulatius on September 19, 2019, 06:33:19 PM
I looked at Aswath Damodaran's SPOT valuation sheet from last year and decided to update it using this years numbers. One of the issues is that the growth extends further into the future, so I decided to reduce the growth rate from Y1-Y5 a bit from 25% into 22% (to account for the year that passed). FWIW, SPOT has grown >30% during the last 12 month.

Surprisingly, I got a valuation that exceed the current market cap quite a bit - the value/share I got was $185 vs a current share price of $125. A few words of caution - I don't get how Aswath came up with a 21% gross margin last year, I put in a 25% gross margins for the premium subscriber part, which is actually lower than what SPOT achieved in Q2 2019 (26%).

Most of the value is driven by the value of new subscribers that have yet to be acquired. I just took those from Aswath's model, minus my adjustment for the Y1-Y5 growth rate. The result is somewhat surprising, but maybe it isn't and just takes into account the 30% growth from last year, while the shares haven't moved. it seems that there might be a good value to be had. I also played with some numbers and found the valuation to cover the share prices as long as they can get a 13% growth rates for the next 5 years.


I will attach the spreadsheet for those that are interested.
Title: Re: SPOT - Spotify
Post by: griezeman23 on September 24, 2019, 08:36:20 AM
Has anyone read the WFC report yet? My impression was that WFC is constrained by the 12m PT that they must give (and admit so multiple times). I also believe that their argument for ST nearer GMs to not improve materially is fair but that they discount too much that the labels will go nuclear - 25% of the labels revenues are now from Spotify (according to WFC). It is hard to imagine they'd go nuclear on that. Anyways, as long as management can keep the labels on the proverbial "hook", then it should allow Spotify to continue to focus on customer acquisition and growth in the ST and further entrench SPOT as the audio platform. If one believes in audio streaming (and Spotify by extension), then once at appropriate scale, one would hope for a hockey stick inflection in earnings as management renegotiates contracts with the labels and podcast producers.

My initial thesis is that this point is not too far off into the future (less than five years) but I have not finished my research yet.

Spek: any idea where Damodaran got his churn numbers??? I am seeing churn closer to 4%/month rather than 5% for the year... If so, that drastically changes the picture on the current valuation using Damodaran's DCF.
Title: Re: SPOT - Spotify
Post by: Spekulatius on September 24, 2019, 11:23:11 AM
I checked the churn numbers and you are correct - the updated monthly churn should be ~ 4.5%, which translated into 42.5% yearly. So here goes the thesis, because the customer value isomer $16 rather than over $100.
FWIW, got stopped out of SPOT at $117. I rarely do stop losses, but for those growth/ momentum stock I do as when they’re moving against you, they really can move a lot. And then, the thesis is broken ( sort ) of anyways now.

Working on updating  Aswaths spreadsheet for Amazon from last year as well and found some smaller issues.

The churn issue with SPOT is huge, so perhaps you should let Aswath know?
Title: Re: SPOT - Spotify
Post by: griezeman23 on September 24, 2019, 11:41:44 AM
I think the difficulty with the churn number is: is this all premium subscribers? I.e. does the 4% monthly number include non-payers who are on-trial, or is the number purely on premium subscribers? Furthermore, the company does state that 40% of its premium subscribers who churn, rejoin within 3 months, 45% within 6 months and 50% within 12 months. So is 4% to 5% monthly churn the right number? I am not sure and hope someone in the community has some more insight than I do. 

I think the stop/loss for growth companies is an interesting way to play these names, as it does prevent too many losses on the downside (can be massive) for a long, long story. However, how/when do you decide to buy back in?
Title: Re: SPOT - Spotify
Post by: Spekulatius on September 24, 2019, 04:16:08 PM
I instituted the stop loss because I had little confidence in the valuation to begin with.  I usually don’t use stop losses. In terms of how to use them, I would think that on would generally look at the price momentum and get back in when the selling subsides.

The bigger question however in this case is that I don’t have a reason to get back into SPOT , because the thesis is broken.

I do agree that looking at the churn in a more granular would give more insights, but short of having these numbers, we need to use what we have and based in that it doesn’t seem like SPOT is a value right now, not even close.

FWIW, I think most of the churn comes from users signing up for a promotion and then cancelling when SPOT  goes to full price after the first 3 month or so.
Title: Re: SPOT - Spotify
Post by: griezeman23 on September 25, 2019, 06:37:48 AM
Spek,

I'd agree with you on the churn with regards to free subscribers.

Why do you say the thesis is "broken"? Sure, in the short-term it is (no leverage with contracts with Big 3) but I'd think SPOT's SG&A is getting to scale given the last three quarters (TTM R&D expense grew 13% y/y down). I think it also shows discipline from management and a confirmation that 2019 contracts will not be renewed at more favorable rates like 2017.

It seems like the main point of contention is whether or not SPOT will be able to pressure the labels enough to reduce their take rate. Was 2017 a blip b/c of the impending IPO so Warner and Sony could sell their stakes? Likely but I still think it's hard to argue that labels take rates (in the LT) will remain at 70 cents on the dollar.

Title: Re: SPOT - Spotify
Post by: spartan on October 01, 2019, 06:12:58 AM
I've been thinking about Spotify almost to the point of insanity for the past week and can't get around their gross margin problem. Ben Thompson wrote about it a while ago: https://stratechery.com/2018/lessons-from-spotify/

Spotify has a lot going for itself:
1) Product is way better than anything out there (I'm a music guy..all of my millenial friends use it too)
2) User switching costs are high (they have pricing power, as evidenced by their price increases in Scandinavia)
3) There's a lot of room for growth (steady increase in user base and pricing, product tinkering will lead to better customer experience, etc.)

I can't get to a point where I see them holding more bargaining power than the major record labels.

Initially, I thought that artists would want to emancipate themselves from the labels (which would lead to bargaining power erosion and supplier fragmentation). But they don't.

Even worse, Spotify removed the 'direct upload' option for artists. Why? Probably to satisfy the demands of labels before the latest negotiating round. At this stage, it is almost impossible to go around the record labels. They still hold all the cards because they own the music..

One could argue that none of this matters. Labels and streaming services are symbiotic, label management are too dependent on cash coming from streaming services and suffer from institutional problems (if I'm a record label manager, I want to make my bonus and avoid getting fired). But labels still hold all of the cards. They own the music. Spotify will never break free from them.

The only bull case I see is this: steroid-induced revenue gains with steady gross margins (25%) while maintaining sane operating expenses. This can still lead to very healthy profits. But again, in my opinion, the labels will not tolerate that and can squeeze them. They sold off their equity stakes in the company, so interests are not aligned.

And who's to say that Spotify can be trusted with the serious task of capital allocation? Will they be kind to shareholders? Time will tell.

It is entirely possible that I am entirely wrong. Spotify can pull this off. (And I hope they do...record labels have caused a lot of pain to artists.)

But then I'm reminded of the following Buffett quote: "I don't try to jump over 7-foot hurdles: I look for 1-foot hurdles that I can step over."
Title: Re: SPOT - Spotify
Post by: griezeman23 on October 01, 2019, 06:59:45 AM
Great points spartan. I have done much of the same.

I think Spotify is not an easy long call to make; the two main points of the bear thesis: label power and big tech competition are relatively hard to argue against.

Label power: I have a hard time, however, seeing either Spotify or the labels really exacting power over each other. If Spotify maintains its market leadership (Apple Music can't really expand beyond the iOS ecosystem and YouTube Music & Amazon Music both have user bases 10% the size of Spotify's; you also mention the stickiness of the product), then its hard to see the labels squeezing Spotify more. Vice versa, I also have a hard time believing that Spotify will squeeze the labels much, because their business is distribution! Thus, I'd pushback on your GMs get squeezed comment (plus they are moving into podcasts which should theoretically begin to help in the 3 to 5 year range).

What I have been struggling with is what does Spotify look like in 10 years? Let's assume podcasts fail to change the margin profile, we stay at a constant 25% GM and that they have an 90/10 split b/w premium and ads. JPM estimated that SPOT could have 1bn premium users based on further geo expansion by 2023 (I think this is aggressive as it implies a CAGR of close to 30% for the next five years, extending this out to 10 years leaves it closer to 15% CAGR; more reasonable given that the marginal user is now coming more often from EM not DM). At an ARPU of $4/month, this yields $48bn in premium revenues. Using our previous split, that would yield $5bn in ad-supported revenues. At 25% GMs and 5% to 10% net margin, this would yield $2.5bn at the low end and $5bn at the high end. Discounting back to today, that gets us $1bn to $2bn in current peak earnings. Thus, SPOT trades at 10x to 20x peak earnings, today. Thus, the market assuming that Spotify reaches this scale with 50%+ probability . 

Ultimately, this analysis is flawed, as it is simple and does not take into the account the impact of podcasts. If one does believe that SPOT can get to 35% GMs, then net margins could go closer to 15%, which would yield SPOT trading at closer to 6x peak earnings (a more interesting proposition, as the likelihood of success is now closer to 30%). Again, we need stellar management (I think Ek and McCarthy are) and belief in the company strategy.

Just some more thoughts and FWIW I think the Buffet quote is apt here.
Title: Re: SPOT - Spotify
Post by: spartan on October 01, 2019, 08:12:27 AM
Great points spartan. I have done much of the same.

I think Spotify is not an easy long call to make; the two main points of the bear thesis: label power and big tech competition are relatively hard to argue against.

Label power: I have a hard time, however, seeing either Spotify or the labels really exacting power over each other. If Spotify maintains its market leadership (Apple Music can't really expand beyond the iOS ecosystem and YouTube Music & Amazon Music both have user bases 10% the size of Spotify's; you also mention the stickiness of the product), then its hard to see the labels squeezing Spotify more. Vice versa, I also have a hard time believing that Spotify will squeeze the labels much, because their business is distribution! Thus, I'd pushback on your GMs get squeezed comment (plus they are moving into podcasts which should theoretically begin to help in the 3 to 5 year range).

What I have been struggling with is what does Spotify look like in 10 years? Let's assume podcasts fail to change the margin profile, we stay at a constant 25% GM and that they have an 90/10 split b/w premium and ads. JPM estimated that SPOT could have 1bn premium users based on further geo expansion by 2023 (I think this is aggressive as it implies a CAGR of close to 30% for the next five years, extending this out to 10 years leaves it closer to 15% CAGR; more reasonable given that the marginal user is now coming more often from EM not DM). At an ARPU of $4/month, this yields $48bn in premium revenues. Using our previous split, that would yield $5bn in ad-supported revenues. At 25% GMs and 5% to 10% net margin, this would yield $2.5bn at the low end and $5bn at the high end. Discounting back to today, that gets us $1bn to $2bn in current peak earnings. Thus, SPOT trades at 10x to 20x peak earnings, today. Thus, the market assuming that Spotify reaches this scale with 50%+ probability . 

Ultimately, this analysis is flawed, as it is simple and does not take into the account the impact of podcasts. If one does believe that SPOT can get to 35% GMs, then net margins could go closer to 15%, which would yield SPOT trading at closer to 6x peak earnings (a more interesting proposition, as the likelihood of success is now closer to 30%). Again, we need stellar management (I think Ek and McCarthy are) and belief in the company strategy.

Just some more thoughts and FWIW I think the Buffet quote is apt here.

Great points. I think that using a 10 year horizon is the right approach. That will give them enough time to build a sizable user base which, given their superior product, is not a hard argument to make.

Re: competition, large tech's products remind me of Rory Sutherland's TED Talk when he talks about "TV / DVD players". Large tech is good at other things, not music. (And your point about Spotify dominating non-iPhone is bang on, so Apple is at a natural disadvantage.) In my opinion, this is an important psychological distinction in the minds of consumers. Spotify does music, and does it well. Period.

In any event, even if Spotify wildly grows its user base (I think JPM is being optimistic with 2023 assumptions..), the cost structure will stay the same (at best) due to record label strength, which eventually dampens the profitability of user growth. Not a genius insight...

If Spotify makes 2 Billion FCF by 2030 we get a discounted EV of $22 Billion (15 multiple, 3.0% discount rate, 10 years).
If Spotify makes 3 Billion FCF by 2030 we get a discounted EV of $33 Billion (15 multiple, 3.0% discount rate, 10 years).
If Spotify makes 5 Billion FCF by 2030 we get a discounted EV of $56 Billion (15 multiple, 3.0% discount rate, 10 years).

If they quadruple revenue by 2030 ($6 Billion -> $25 Billion) and get GM to 30%, that still leaves only $7.5 Billion of GM. After operating costs, you're not left with much.

With current EV of roughly $17 Billion (net cash of $3 Billion), this is not a slam dunk. Come to think of it, maybe I should short it...haha
Title: Re: SPOT - Spotify
Post by: griezeman23 on October 01, 2019, 08:27:10 AM
3% discount rate? Would 10% not be more appropriate?

I also think 15x may be a bit a low in today's environment, given that SPOT should grow faster than global population growth in the LT (mostly targeted towards younger cohorts, so death rate should be lower, increasing cohort TAM growth). We can squabble on multiples but SPOT clearly does not have the best business model relative to other consumer internet players.

Why I have been interested: management bought back shares in the $120s range, there have been no insider sales since the co. went public via direct listing and I like management. Agree it is not a slam dunk.
Title: Re: SPOT - Spotify
Post by: chesko182 on October 01, 2019, 08:55:03 AM
You also need to account for the cash build over the next 10 years, you can't just ignore that... This is FCF positive company even though it loses money on a GAAP basis, because of the neg working capital dynamics (subscribers pay upfront, royalties go out much later). So there's certainly going to be an interesting cash generation over the next 10 years along with some operating leverage in R&D and SG&A.

a 7.5bn gross profit would certainly leave something after operating costs, I wouldn't describe this as "not much".. how much will they be spending in R&D and SG&A by then? prob much less on a % of revenue basis than they are now.
Title: Re: SPOT - Spotify
Post by: griezeman23 on October 01, 2019, 12:40:15 PM
That's a great point and not factored in to this very basic analysis. The ARPU number is also relatively conservative, imo, given SPOT most likely has some pricing power in certain regions (Scandinavia they do!). It requires some more work on my end, but I think SPOT does look interesting here. Again, I am not sure that it is a a slam dunk given the growth (and at scale) that they need to see. But I may change my mind as I do more work.
Title: Re: SPOT - Spotify
Post by: chesko182 on October 01, 2019, 01:36:00 PM
Can you think about other examples where a few suppliers choke off their biggest & fastest growing customer to the point where it becomes permanently unprofitable? I can't. I agree about the point that the label's product (the back catalog) is basically irreplaceable and a must-have as there are no alternatives but switch this point of view around -invert always invert!- and ask yourself: why would any of the three labels ever think about removing their catalog from spot? spot accounts for 25% of their revenues now, sometime in the future, this may be between 40-50%. Will they really risk losing that share of revenue (and give more revenue to their competitors) and have to deal with all the artists complaining that they stopped getting paid because they decided to remove the catalog? for what for exactly, to threaten them and get a few % more in royalties? My base case is they figure something out that works for both of them.

A good comparison may be the Cable Co's/Content Providers historical relationship in the 90s or so (this is broken now). Cable companies needed to have the content and content providers needed them for distribution (spot essentially owns the distribution pipes for music right now). The relationship was extremely profitable for both parties. Yes, in the case of labels there's only three controlling most of the pie, but I think it's still valid to look at it through this lens. With TV content, there were still a handful of channels that you really had to carry if you wanted to compete, and these were controlled by a few content companies (think HBO, CNN etc). So I think this will end up in a similar place when things normalize.

This will def be an interesting dynamic, but my bet would be they figure something out that is beneficial to both parties. One needs the other one to survive and this should eventually be reflected in their economics.

There are multiple paths for higher gross margins, either by lowering label payments (high bar and will take time) or other monetization methods, spot has already said its 2-sided marketplace strategy will do just this: using all the data they have and sell this to labels & artists, which would go straight to the bottom line (confirmed in their last conf call by the CFO).

Also think about podcasts (original content), advertising (huge in podcasts, under earning right now), concerts/ticketing, merchandise etc. Spot pretty much owns the customer relationship and when you're on top of the funnel you usually monetize better.

Don't think this is a 1 foot hurdle, but at the current price there's pretty much no optionality being reflected considering the multiple paths to higher gross margins they have. And whether they get to 1bn users in 5 or 10 years don't think matters that much, at that level of users I don't think any company is a pushover, less so in a business were scale is so important. If you have any confidence that they can get anywhere close to that number, I think this makes sense as a long term investment as the rest should take care of itself.
Title: Re: SPOT - Spotify
Post by: dwy000 on October 01, 2019, 01:51:11 PM
"Can you think about other examples where a few suppliers choke off their biggest & fastest growing customer to the point where it becomes permanently unprofitable?"

I think you described the perfect example - cable companies and content.  ESPN, local sports, local retransmission, high profile cable channels - they all got so expensive that the cable companies started dropping them or moving them to higher priced tiers (where customers then dropped them).  A couple of cable companies have gotten out of cable entirely (eg CABO) claiming that it was no longer profitable given they were being choked by the content providers.  Cable is no longer a very profitable business and it is largely just retained to maintain the ownership of the customer.

I suspect the labels will go wherever they can get the most $ for their product.  And it's not exclusive so anywhere and everywhere as long as they are willing to pay.  Spotify is another customer for the labels (a big one but still just a customer).  The labels are life and death to Spotify.  They will bleed Spotify, if not to death, to the point of indifference if they can.
Title: Re: SPOT - Spotify
Post by: Spekulatius on October 01, 2019, 03:05:16 PM
Spek,

I'd agree with you on the churn with regards to free subscribers.

Why do you say the thesis is "broken"? Sure, in the short-term it is (no leverage with contracts with Big 3) but I'd think SPOT's SG&A is getting to scale given the last three quarters (TTM R&D expense grew 13% y/y down). I think it also shows discipline from management and a confirmation that 2019 contracts will not be renewed at more favorable rates like 2017.

It seems like the main point of contention is whether or not SPOT will be able to pressure the labels enough to reduce their take rate. Was 2017 a blip b/c of the impending IPO so Warner and Sony could sell their stakes? Likely but I still think it's hard to argue that labels take rates (in the LT) will remain at 70 cents on the dollar.

The thesis is broken because my valuation models gives me NPV numbers far below EV when I put in higher churn numbers. The business model may work, but I think the valuation doesn’t. One pretty much needs to assume that they generate growth besides the music vertical to justify the current valuation, or higher profitability or growth rates than the generous assumptions in Aswath spreadsheet. I like the management, the branding, but it seems that their profitability is restrained by the cut that labels allow it. the music ecosystem is interesting and attractive, so maybe I just need to find another way (buy a company owning the labels like Sony or Bollore) to make it work within my valuation framework.

Or perhaps Aswath and by extension my valuation is wrong, but I haven’t seen anything they suggest otherwise.
Title: Re: SPOT - Spotify
Post by: blainehodder on October 02, 2019, 07:31:31 AM
I just don't see how the labels retain take rate indefinitely when they are an almost completely useless middleman in music today. They are basically the patent trolls of music. The bargaining power they have today seems certain to erode. How that plays out I do not know, but useless entities tend to get cut out of profits in time. Labels ownership over living artists music seems certain to trend towards zero. T-Swift is 100% right about the direction, and new pop music absolutely dominates streams.
Title: Re: SPOT - Spotify
Post by: chesko182 on October 28, 2019, 05:12:13 AM
Strong Q3 results:
-MAUs up 30%
-Premium subs up 31%
-FCF positive, Op Income positive
-Churn improved 19bps YoY
-Podcast usage up 39%
-Unfortunately CFO Barry McCarthy is retiring
-Started to announce Two-sided MarketPlace strategy:
   Sponsored Recommendations - Available to select major and independent label partners as part of our recently announced paid beta in the U.S., this is Spotfy’s first cost
per click ad product which leverages our listener graph of music tastes to promote new releases to free and paying users.

As always, a pleasure to read the letter:

https://s22.q4cdn.com/540910603/files/doc_financials/2019/q3/Shareholder-Letter-Q3-2019-[Final].pdf
Title: Re: SPOT - Spotify
Post by: griezeman23 on October 29, 2019, 09:03:49 AM
Overall, a really great quarter. I did like how Spotify called out their performance relative to expectations since the direct listing and their comments about competition but disliked how McCarthy was particularly strong-worded against competition in an FT article. https://www.ft.com/content/fd0802e0-f96e-11e9-a354-36acbbb0d9b6

It does get me a bit concerned; however, as some of the comments seem a bit petty. On the flip side, if people keep questioning your viability as a business for, then I can imagine it does stir up some reasonably strong emotions.

Last thing was the commentary on podcasts was pretty poignant. I think it can be read two ways: a pump vs. a strong data point. My read is that Ek/McCarthy are great leaders, so I'd lean towards the latter argument but I have not followed Spotify (at a very in depth level) for a long enough to be 100% certain.
Title: Re: SPOT - Spotify
Post by: Liberty on November 12, 2019, 06:39:23 AM
Good podcast interview with Daniel Ek:

http://investorfieldguide.com/ek/
Title: Re: SPOT - Spotify
Post by: chesko182 on January 25, 2020, 04:58:46 PM
 A very interesting take https://venturedesktop.substack.com/p/spotify-the-ambient-media-company
Title: Re: SPOT - Spotify
Post by: chesko182 on April 29, 2020, 05:04:38 AM
Q1 out.

"Despite the global uncertainty around COVID-19 in Q1, our business met or exceeded our forecast for all major metrics. For Q2 and the remainder of the year, our outlook for most of our key performance indicators has remained unchanged with the exception of revenue where a slowdown in advertising and significant changes in currency rates are having an impact."

"Q1 2020 was the third consecutive quarter of year on year growth above 30%. In all four of our regions, MAU grew faster in Q1 2020 than it did Q1 2019. Growth in North America accelerated for the 2nd straight quarter led by outperformance in the US, as did growth in our largest region, Europe. Our Latin America and Rest of World regions continue to see the fastest growth, with those segments growing 36% and 65% Y/Y, respectively."

https://s22.q4cdn.com/540910603/files/doc_financials/2020/q1/Shareholder-Letter-Q1-2020-Final.pdf
Title: Re: SPOT - Spotify
Post by: chesko182 on May 19, 2020, 11:55:04 AM
Up almost 11% today, and rightfully so. Huge move today with signing Joe Rogan exclusively for Spotify INCLUDING videos...(a first for spotify)

Pretty insane

https://newsroom.spotify.com/2020-05-19/the-joe-rogan-experience-launches-exclusive-partnership-with-spotify/

https://www.theverge.com/2020/5/19/21263927/joe-rogan-spotify-experience-exclusive-content-episodes-youtube
Title: Re: SPOT - Spotify
Post by: Liberty on May 19, 2020, 12:24:20 PM
Sucks for the podcast ecosystem generally, but good for Spot.

Too bad their podcast player kind of sucks. Can't believe the speed settings aren't more granular (goes from 1.5 to 2) and there's no dynamic silence trimming... I also hear it sometimes loses where you are and starts over. Sounds like a RealPlayer(tm) experience... Surprised they haven't been better about that since they obviously are focusing on podcasting a lot.
Title: Re: SPOT - Spotify
Post by: oscarazocar on May 20, 2020, 06:03:50 AM
SPOT should acquire Overcast, which is an incredibly good podcast app and I believe owned by one guy.
Title: Re: SPOT - Spotify
Post by: Liberty on May 20, 2020, 06:24:38 AM
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
Title: Re: SPOT - Spotify
Post by: chesko182 on June 11, 2020, 02:07:29 PM
"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/
Title: Re: SPOT - Spotify
Post by: griezeman23 on June 14, 2020, 03:35:14 AM
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.

Title: Re: SPOT - Spotify
Post by: jfan on July 06, 2020, 01:06:23 PM
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.






Title: Re: SPOT - Spotify
Post by: spartan on July 06, 2020, 02:50:33 PM
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.
Title: Re: SPOT - Spotify
Post by: Spekulatius on July 06, 2020, 04:15:22 PM
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.
Title: Re: SPOT - Spotify
Post by: glorysk87 on July 07, 2020, 12:40:42 PM
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.
Title: Re: SPOT - Spotify
Post by: chesko182 on July 07, 2020, 01:58:33 PM
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.
Title: Re: SPOT - Spotify
Post by: spartan on July 07, 2020, 05:54:38 PM
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.
Title: Re: SPOT - Spotify
Post by: Spekulatius on July 07, 2020, 07:11:06 PM
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.
Title: Re: SPOT - Spotify
Post by: villainx on July 07, 2020, 08:00:51 PM
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.
Title: Re: SPOT - Spotify
Post by: dwy000 on July 07, 2020, 09:03:44 PM
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.
Title: Re: SPOT - Spotify
Post by: villainx on July 07, 2020, 10:09:40 PM
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.
Title: Re: SPOT - Spotify
Post by: glorysk87 on July 08, 2020, 11:45:59 AM
https://adage.com/article/digital/joe-rogan-experience-helps-spotify-win-20-million-deal-omnicom/2266206
Title: Re: SPOT - Spotify
Post by: jfan on July 09, 2020, 09:21:19 PM
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.



Title: Re: SPOT - Spotify
Post by: fareastwarriors on July 22, 2020, 09:25:29 AM
Netflix of Audio?

https://www.reuters.com/article/us-spotify-vivendi/spotify-strikes-new-deal-with-vivendis-universal-music-group-idUSKCN24N1LG (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
Title: Re: SPOT - Spotify
Post by: kc2610 on July 29, 2020, 06:58:18 AM
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.


Title: Re: SPOT - Spotify
Post by: Broeb22 on July 29, 2020, 10:43:08 AM
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.
Title: Re: SPOT - Spotify
Post by: chrispy on July 29, 2020, 04:55:42 PM
I believe that is why Spotify is pushing into podcasts hard (signing Rogan, etc)
Title: Re: SPOT - Spotify
Post by: Spekulatius on July 29, 2020, 05:04:38 PM
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.
Title: Re: SPOT - Spotify
Post by: kc2610 on July 29, 2020, 07:22:34 PM
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.
Title: Re: SPOT - Spotify
Post by: jefke on July 30, 2020, 05:16:36 AM
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.


Title: Re: SPOT - Spotify
Post by: Broeb22 on August 10, 2020, 11:21:34 AM
https://www.dropbox.com/sh/imqj7tk724xpw7n/AAB1u8DA3Um08fL_jC2IDKuPa?dl=0&preview=Coho+Capital+2020+Q2+Letter.pdf (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.
Title: Re: SPOT - Spotify
Post by: kc2610 on August 11, 2020, 06:36:11 AM
https://www.dropbox.com/sh/imqj7tk724xpw7n/AAB1u8DA3Um08fL_jC2IDKuPa?dl=0&preview=Coho+Capital+2020+Q2+Letter.pdf (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.
Title: Re: SPOT - Spotify
Post by: KJP on August 11, 2020, 06:57:08 AM

Where might I find them? Thanks.

Here:  https://www.reddit.com/r/SecurityAnalysis/wiki/letters
Title: Re: SPOT - Spotify
Post by: Broeb22 on August 11, 2020, 12:36:23 PM
https://www.dropbox.com/sh/imqj7tk724xpw7n/AAB1u8DA3Um08fL_jC2IDKuPa?dl=0&preview=Coho+Capital+2020+Q2+Letter.pdf (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.

Coho does great work. They are very much so in the growth world but their writing style reminds me a lot of Nicholas Sleep. At my prior job, we had a PDF version of Sleep's letters. I didn't know how rare they were but I have since been unable to find his letters either.
Title: Re: SPOT - Spotify
Post by: thefatbaboon on August 11, 2020, 11:52:21 PM
Thanks for the Coho writeup on Spotify it was an interesting read.

In the concluding prognosis of a future where Spotify doubles ARPU and has 600m paying subscribers ...he doesn't say what Apple, Amazon and Google will be doing. Does he expect them to be charging 50% of what Spotify charges?  If the tech giants who reach every internet connected human alive are happy taking tomorrow what they take today for unlimited music streaming and charging half what Spotify does how many of the projected 600m consumers are going to stick with Spotify?

I had  another question too but more from the label side of things...like if Spotify tries to change the labels' share from 80% to 50% or whatever we are imagining here...again what if the tech giants simply continue to pay the labels their share as they do currently?  Why would the labels not withhold their content from Spotify and trust that all of Spotify users would be able to find one of: Apple, Google or Amazon?

Also we never get any discussion of CRB and how the regulations and compulsory licenses work in the USA.
Title: Re: SPOT - Spotify
Post by: griezeman23 on August 12, 2020, 05:40:28 AM
Quote
Does he expect them to be charging 50% of what Spotify charges?  If the tech giants who reach every internet connected human alive are happy taking tomorrow what they take today for unlimited music streaming and charging half what Spotify does how many of the projected 600m consumers are going to stick with Spotify?

I am guessing the labels are going to pressure all the distributors to raise prices once they have reached a certain level of penetration. Likely the days of $3 / month for 3 months or free for 6 months days will end.

But the more important sticking point for Spotify (and other distributors) to the labels since the start is that the labels were overcharging customers in the pre-Internet days. They were only attracting the high-end customers. While it was more profitable per unit, the total $ amount of profits captured was far lower as it excluded a whole class of customers who chose to listen to music for free (via ads). So, while assuming ARPU is doubled and subscribers go to 600mn may seem unreasonable, the bigger thing that Spotify is able to do is aggregate audio listeners... Meaning that the big money to be made (on monetization) is not on the paid subscriber side but rather the ad-supported side.

This is the whole reason for the push into podcasts, because there is a huge chance to aggregate the podcast space akin to the early internet days (h/t Stratechery). Plus, with more data, the better targeting gets, prices rise and the flywheel begins to churn. After this last call, I am becoming increasingly confident that Spotify is going to look to somehow enter the audiobook space as well.

Quote
if Spotify tries to change the labels' share from 80% to 50% or whatever we are imagining here...again what if the tech giants simply continue to pay the labels their share as they do currently?  Why would the labels not withhold their content from Spotify and trust that all of Spotify users would be able to find one of: Apple, Google or Amazon?

Well, Spotify is roughly 20% of Warner music's revenues (30% b/w Apple and Spotify per their K, and Spotify's subscriber base is 2x that of Apple Music) and roughly 30% of UMG's revenues (based on Dec 2019 investor presentation and 50% share). So, I'd think for financial reasons it would be hard to argue that they pull their music plus the most active music listeners (users spend 2x as much time on average listening to Spotify than they do at Apple Music) are on Spotify so there would likely be HUGE backlash against the labels if this happened.

As Spotify scales and their market share continues to grow (I am guessing Apple Music has gone nowhere fast since they disclosed 60mn subscribers in 2Q19 and anecdotally, all my friends are switching to Spotify because of the social integration), then they'll be able to extract a better seat at the negotiating table. Personally, I don't bake in any upside to GMs for label negotiations but I'd say it is more likely that Spotify continues to gain power over the labels rather than the other way around.

While Spotify has doubled, the stock still trades 2x lower than Netflix does and the pathway to GMs in the 30s seems clearer today than a year ago.
Title: Re: SPOT - Spotify
Post by: thefatbaboon on August 16, 2020, 01:44:00 AM
I really want to understand the bullish spotify argument better. Please bear with me a bit...

I asked what the giant DMPs would do in a world of doubling ARPU for Spotify and your answer is that the Labels push through increases for all DMPs.  OK so in this environment where everyone's ARPU doubles isn't Spot still kicking 70% revenues to the labels?  I mean if they aren't it kind of begs my original question, ie what do the other DMPs do if the labels accede margin to them. The issue I have is can Spotify's costs for music ever be meaningfully less than Apple, Amazon and Google and if these DMPs want to can't they always pass on music to their customers at cost? 

I also don't see the comparison to Netflix. 

Distribution: Netflix had and continues to have 100s of relatively small local distributors:  all the worlds cable, copper and cellular companies.  On the other hand every Spotify relationship is mediated by Apple and Google, who have competing music products that they can toggle and bundle more or less aggressively. 
Content: music is regulated, and truly exclusive music is nearly impossible in most major markets. So if a service wants to provide Beatles they can so long as they pay.

Spotify just seems like an app joint venture between the labels and the phone duopoly.  They get enough of a margin "to taste" but nothing more, step out of line and they'll just get squeezed back into line.
Title: Re: SPOT - Spotify
Post by: griezeman23 on August 17, 2020, 07:11:49 AM
So, on your inability to see the bull case for Spotify: I think it stems from two facts: 1. It is a commodity competing against big tech; 2. It is only about music and the labels will always control content. Please correct me if I am wrong.

1) My reasoning on why Spotify is not a commodity music player:

Today, music listening is still relatively akin to broadcast TV. We know the largest artists make a disproportionate amount of all streams / money in the industry. I think one of the key things Coho picked up on was that last year, the top 90% of all streams were from 16k artists. Now, 32k artists account for the top 90% of streams. I imagine that music will become more and more niche, as discovery becomes an even bigger part of folks lives. This is not to say that there won't be big winners in music, there always will, but I imagine that their importance or share of the music industry revenues and mind share will decline. Who's driving this? Spotify. Look at mature streaming markets: https://twitter.com/compound100x/status/1294530406297948160/photo/1. https://www.digitalmusicnews.com/2017/08/14/spotify-youtube-sweden-norway-streaming/ (last two charts).

Now, if these markets were widely distributed in terms of DMPs, then I'd think this would point to your argument that Spotify is a commodity. But that is not the case. I think this is because Spotify has more data on listening than anyone. On average, Spotify listeners listen to 2x the music that Apple Music listeners do, and Spotify is more than twice as large (per last Apple Music update). More data means a better recommendation algorithm. And that is what is driving users to listen to more (and new) music. I think the algorithm then means that Spotify is not a commodity.

But the key thing is to continue making music and listening social in order to create network effects. Which they are doing with the ability to make "live" playlists with friends, as well as follow each other's playlists. They also have hugely influential playlists like Rap Caviar that dictates what's popular in today's music. https://www.vulture.com/2017/09/spotify-rapcaviar-most-influential-playlist-in-music.html. This is showing up in continually improving engagement (https://www.edisonresearch.com/the-infinite-dial-2020/). Amazon Music is seemingly the only other DMP making meaningful gains outside of Spotify.

So, I don't think Spotify is a commodity. Is the overwhelming in my favor? No. This is why this a heavily debated stock and on an EV / EBITDA per user basis, trades nowhere near NFLX.

2) My reasoning on why Spotify is not just beholden to the label:

So, if Spotify is driving what people want to listen to and knows what type of music each person wants to listen to, I think this erodes the power of the labels. They'll be able to help these labels figure out how popular an artist may be. I think this is a key part of the two-sided marketplace.

Compared to other DMPs (I am assuming this means Apple Music, etc.), right now, it seems unlikely that Spotify should have a better take rate than the others. But, if they own say, 70%+ of listeners (at about 50% and anecdotally more folks I know are switching to Spotify away from other DMPs), when the business is mature and they are "dictating" what folks are listening to relative to peers because of better (and more) data, then I do think it is possible they improve the take rate. To do this, they need to have network effects and take a larger share of listeners (and this is where podcasts help).

Quote
Content: music is regulated, and truly exclusive music is nearly impossible in most major markets. So if a service wants to provide Beatles they can so long as they pay.

On content: agree on music. This is why podcasts are an important piece of the pie. I don't think the opportunity is as large as some may think but I do think it is a meaningful and important business for Spotify. I think the importance of podcasts are both the ability to grow the business but hold power over the labels.

I am not sure how the contracts with the labels are written, but I would be suprised if the labels can take 70% of the subscription fee, when say, a 50% of a user's time is spent listening to podcasts. Even if this is the case, I think this may have been how Spotify signed up UMG for the two-sided marketplace: i.e. ignore podcasts from listening and keep the pay rate the same. I believe this is the power of diversifying away from music. I believe this is the point of the two-sided marketplace is that it is a hedge against an inability to improve their take rate.

So, the story is no longer just about music. Music is the most important piece, but I believe that podcasts and other forms of audio (I imagine they'll get to audio books at some point) will become a large portion of the business (30% of the value). 
Title: Re: SPOT - Spotify
Post by: NewbieD on August 17, 2020, 09:41:11 AM
They have a job posting for Head of Audiobooks up 8)
Title: Re: SPOT - Spotify
Post by: griezeman23 on August 17, 2020, 10:45:48 AM
They have a job posting for Head of Audiobooks up 8)

LOL had no idea! Just posted last week... https://www.linkedin.com/jobs/search/?currentJobId=1980737916&keywords=spotify%20audiobooks
Title: Re: SPOT - Spotify
Post by: Castanza on September 18, 2020, 12:20:55 PM
https://www.businessinsider.com/spotify-report-joe-rogan-transphobia-fight-employees2020-9
Title: Re: SPOT - Spotify
Post by: Liberty on October 04, 2020, 12:20:21 PM
Interview with Daniel Ek:

https://www.theobservereffect.org/daniel.html
Title: Re: SPOT - Spotify
Post by: chesko182 on October 16, 2020, 01:33:00 PM
Matthew Ball's long-form essay a history and the future of Audio, worth a read. Some very interesting comparisons to other mediums like TV, video games and even texting.

https://www.matthewball.vc/all/audiotech
Title: Re: SPOT - Spotify
Post by: Xaston on October 16, 2020, 02:05:34 PM
I love his writing, excited to read this
Title: Re: SPOT - Spotify
Post by: aglittell on December 01, 2020, 09:42:44 PM
It's that time of the year. Spotify released their "Wrapped Up" review today - showing users all sorts of statistics on their listening activity for the year. This has become a big social event, at least on my Instagram feed for the last two years (my feed may be biased as it is filled with college kids). People will post their listening stats to share with the rest of their followers. As a shareholder, I love it. It's free marketing and it instills a sense of social FOMO in the non-Spotify subs. The most common stat shared on my feed has been listening activity. I just scrolled past a classmate of mine who had spent over 123k minutes listening on the app. To put that into perspective - that is 2050 hours, 85 days, or 23% of his year. He is an outlier in terms of listening activity but even if the average user is someone like myself who had 46k minutes streamed, the engagement is staggering. My personal favorite stat was that I listened to 793 new artists this year.

What is my classmate's maximum willingness to pay for a service that he spent 23% of his year on? Is it more than the $5/month college discount he is on? Now you can make the argument that people have always listened to music and that music is a commodity that could be listened to through alternative mediums, but I think that argument becomes less compelling as Spotify continues to innovate with features like Wrapped Up.
Title: Re: SPOT - Spotify
Post by: Arski on December 02, 2020, 07:15:14 AM
It's that time of the year. Spotify released their "Wrapped Up" review today - showing users all sorts of statistics on their listening activity for the year. This has become a big social event, at least on my Instagram feed for the last two years (my feed may be biased as it is filled with college kids). People will post their listening stats to share with the rest of their followers. As a shareholder, I love it. It's free marketing and it instills a sense of social FOMO in the non-Spotify subs. The most common stat shared on my feed has been listening activity. I just scrolled past a classmate of mine who had spent over 123k minutes listening on the app. To put that into perspective - that is 2050 hours, 85 days, or 23% of his year. He is an outlier in terms of listening activity but even if the average user is someone like myself who had 46k minutes streamed, the engagement is staggering. My personal favorite stat was that I listened to 793 new artists this year.

What is my classmate's maximum willingness to pay for a service that he spent 23% of his year on? Is it more than the $5/month college discount he is on? Now you can make the argument that people have always listened to music and that music is a commodity that could be listened to through alternative mediums, but I think that argument becomes less compelling as Spotify continues to innovate with features like Wrapped Up.

I'm also subscribed to Sportify and it is indeed great. I also love wrapped up, that you see what you listened in the past year.

The average listening minutes of me and my friends are 50.000 minutes (18,19 & 20 year old college boys) and to be honest I am willing to spend more than the $45 per year I'm paying now for the service/platform. So I think they are looking quite monopolistic and are able to raise prices.
Title: Re: SPOT - Spotify
Post by: Arski on December 02, 2020, 07:17:28 AM
By the way, I'm no shareholder and are also not interested in holding it for the moment, because of the immense high price.
Title: Re: SPOT - Spotify
Post by: Jurgis on December 02, 2020, 07:30:06 AM
Doesn't any price raise automatically go 70% to music cos?
Title: Re: SPOT - Spotify
Post by: Xaston on December 02, 2020, 07:58:12 AM
Doesn't any price raise automatically go 70% to music cos?

No.  Money from increased user #s goes largely to the music cos, but not price increases.  The music companies are getting paid anytime a song they own the rights to gets played.  But if spotify can charge more for the monthly privilege of customers being able to stream those songs on their platform, without an increase in the amount of streaming the user does, all that price increase goes straight to spotify.

I think.
Title: Re: SPOT - Spotify
Post by: Arski on December 03, 2020, 01:26:55 AM
Doesn't any price raise automatically go 70% to music cos?

No.  Money from increased user #s goes largely to the music cos, but not price increases.  The music companies are getting paid anytime a song they own the rights to gets played.  But if spotify can charge more for the monthly privilege of customers being able to stream those songs on their platform, without an increase in the amount of streaming the user does, all that price increase goes straight to spotify.

I think.

Nope, you have to see it as all the money that gets collected in a country and that will be divided by the streamingsshare the artists have. For example Drake has a lot of streams and will of course have a bigger streamingsshare than most of the artists in the US. All that money is than divided between the artists, record companies etc., this will also differ per artist/record company because some might have different contracts than others, and spotify will keep a portion of it.

https://artists.spotify.com/video/how-spotify-pays-you (https://artists.spotify.com/video/how-spotify-pays-you)