September Idea Competition - The Spotify Machine
September Idea Competition - The Spotify Machine
The pitch was shared at Commonstock as an entry in the September Idea Competition. There was limit of 750 words (or less) and the competition ends on September 26th, if you would like to take a swing at the competition click here or if you would like to vote for my Spotify pitch you can click here.
September Idea Competition - SPOT 0.00 The Spotify Machine
Spotify was founded in Sweden around 2006 by Daniel Ek and Martin Lorentzon, with the idea to make music available for everyone for “free” while at the same time to make sure that artists also get paid for their music (unlike with pirating, where artists would get nothing for their “stolen” music).
The streaming service launched on October 7, 2008 and the company initially limited the sign-up for free services by making it invite-only. In 2010 Spotify launched in UK and 2011 in USA.
In 2018 Spotify went public via NYSE with ticker symbol $SPOT.
What is Spotify?
Spotify is global digital music streaming service. It gives users instant access to its vast online library of music and podcasts, and soon to be audiobooks (and who knows what else, Spotify is always trying new things).
Some say Spotify is just another streaming service company, but I say it’s the ONLY true company for all type of creators around the world who wish to express themselves via audio format.
Currently there is about 433+ million MAUs:
About 182+ million are paying subscribers:
How does Spotify (currently) make money?
Spotify offers Premium and Ad-Supported Services. Both are separate and yet depend on each other. Ad-Supported is used as funnel to attract new costumer which later are to be converted into premium subscribers. There are many tiers when it comes to Premium, Spotify tries to cater to everyone (individuals, students,duo, and family) while also having different prices for second/third world countries(all depends on the audio quality/ability of a country).
How Spotify "losses" money
This is also where the controversy comes with Spotify, because large chunk of profits Spotify gives back to labels/artist, because Spotify doesn’t own music that it plays (remember about the piracy? This is how Spotify got rid of it, sort of)
Because of this, Spotify’s gross margins have been high 20+ with some improvement but not dramatically enough for markets to not worry about Spotify’s future...
But that will change with new segments…
Quick look at financials
Given the current pessimistic global environment and Spotify being growth company, I won’t be giving any kind of precise valuation methods as this is not the way that I (being a shareholder) started position in $SPOT, but I will run through my thought process.
I think currently Spotify is undervalued (vs what the future holds) by how much exactly is it?
I can’t say, that is why I’ll DCA as it goes lower.
Before going into bullish thoughts, I want to say that I understand that Spotify is not perfect and has to keep evolving/growing in order to stay ahead of competition, but in the tech world who isn’t?!
Here are reasons why I’ comfortable buying $SPOT as it goes lower…
Large TAM with profitable segments + new segment like audiobooks/podcasting in different languages + population and number of smartphones and IoT devices are increasing yearly.
Spotify’s aggressive move into podcasting and perfecting Ad technology.
Spotify superior product to other audio services:
Spotify is still run by the original founder who is still obsessed with audio. Daniel Ek also owns 7% of the company and has the voting rights (given by other large shareholders).
Although Spotify has to give large slice of the music profits to labels/artists, as Spotify gets bigger, they gain more power to negotiate in their favor if/when they need to.
Other segment will distance Spotify from music/labels depends.
As more new cars come on the road with modern displays (with app stores) there is a possibility of Spotify to dominate “car audio experience” even without the Car Thing, and take share from the radio.
Spotify owns 8% of $TME and Tencent owns about the same about of $SPOT, I’m sure there is a bull case in there somewhere with that combo.
Spotify has shown to be FCF positive, but chooses to spend all of that cash back into things like improving experience, podcasting, audiobooks, having cash for emergency/negotiations with labels and other things.
Selling concert tickets, merchandise, and streaming live concerts via live feed or metaverse.
Spotify’s willingness to keep trying new things and learn from (positive and negative) experience.
Their AI & amount of data that users are willingly sharing, lets Spotify to constantly tune/improve its products.
The possibilities with audio ARE really endless…
After completing this pitch I got an idea to ask y’all.
Would you be interested in these kind of quick dives additionally to deep dives (that I rarely post because they take a lot of time). This kind of pitches are a lot quicker for me to do vs deep dives (that can go up to 4,000+ words) and its actually fun (not easy to pull of though but not as stressful as deep dives, yet) to pitch something with 750 words or so and get some feedback from other investors…
…putting “pen to paper” (I think) would also show how much I really know vs how much I think I know on my investments…
Holdings Disclosure
At the time of this publication, I do own shares of SPOT 0.00 .
Disclaimer
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Nice write up on SPOT. I will add it to my watchlist and dig a little deeper to better understand the company's business model. Thanks!
I agree broadly with your thesis. Bears on Spotify tend to point to the low margins (for a software company). For me the thesis is relatively simple high level:
- Streaming audio will be a much larger market 10 years from now
- Spotify will remain a top tier player in the space
The speed at which they continue to innovate in podcasts and audio books leads me to believe that they will continue to create new growth avenues that should incrementally add to their margins.
I also think, like you pointed out, that the distribution of audio will be of strategic importance. Right now the labels have the lions share of the control. But Spotify, et al control the distribution and the interaction with the customer. This should give them significantly more leverage over the labels. Either direct (better royalty rates) or indirect (better data and customer insights for which the labels will pay fees).
The bear case is that the labels retain and maybe grow their control on royalty rates. And that the additional services that Spotify fail to gain traction or scale with users. In which case they would not experience expanding GM%.
It should be fund to watch!