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Spotify Idea Proposal (SPOT)

Spotify Idea Proposal (SPOT)
 

Is Spotify the next Netflix or the next Pandora?

Report Available: July 24, 2018

 

Blueshift’s initial research found strong revenue and subscriber growth in SPOT’s first earnings report as a public company but also some question marks around profitability and revenue per user. SPOT’s success and growing influence in the music industry has led to some comparisons to NFLX, but content control and costs remain huge obstacles. SPOT also faces formidable competition from AAPL, GOOG/GOOGL, AMZN, and others.

 

Observations

  1. SPOT went public on April 3 and a month later reported Q1 earnings that disappointed some investors, triggering a brief sell-off. The streaming music service’s Q1 revenue of $1.36 billion was up 26% year-over-year and roughly in line with analyst estimates, but the company’s $202 million loss was wider than expected. SPOT’s number of monthly active users rose almost 30% to 170 million, including 75 million paying subscribers. However, some of its promotional efforts to attract new subscribers, such as offering discounted student and family plans, cut into average revenue per user. Revenue from ads shown to users of SPOT’s free service was down 22% from Q4. SPOT offered broad guidance for Q2, telling investors that its operating loss could be anywhere from $70 million to $165 million.
  2. SPOT’s clout in the music industry continues to build. A May study by the European Commission calculated that a song being included in SPOT’s “Today’s Top Hits” playlist can increase the number of times it is streamed by as many as 20 million. SPOT’s growing influence has led some to compare its potential to that of NFLX – a juggernaut of an on-demand entertainment company. A key difference, though, is that NFLX has morphed from a provider of licensed library content to a leading developer of original shows and movies, while SPOT has no original content and is reliant on the major record labels to license music. Recently, SPOT has reportedly been trying to make direct deals with independent artists, possibly part of a long-term strategy to give it more control over content.
  3. SPOT’s biggest obstacle to profitability is content costs, as it pays out 80% of its revenue in royalties and distribution costs. The same issue has plagued rival service P, which was once a darling of Wall Street as ad revenue soared and its user base grew. But P has never been able to solve the content cost puzzle, reporting losses of $343 million and $518 million in 2016 and 2017, respectively. SPOT renegotiated its major licenses last year and its cost of revenue was down to 75% of sales in Q1. The company recently received approval for a $112 million settlement with artists who claimed they did not receive proper compensation for the use of their songs. But SPOT still faces multiple other lawsuits, including a $1.6 billion claim by music publisher Wixen.
  4. SPOT’s other challenge is a gauntlet of deep-pocketed competitors, including AAPL, GOOG/GOOGL and AMZN. AAPL, after several fits and starts with its music service, is up to an estimated 40 million paying subscribers at the same $9.99 per month price point as SPOT. Meanwhile, Chinese social media giant Tencent Holdings is planning to spin off its streaming music service, which already has 78% market share in China.
  5. SPOT appears to have plans to develop some type of hardware for streaming music. The company has registered with the FCC for testing a wireless device, and various reports suggest it may be designed for cars whose infotainment systems lack the ability to stream music.
  6. Blueshift Research has been highlighting P’s difficult road in the streaming music industry since 2011. In our most recent report in June 2016, sources said P was stepping into a legal minefield with its plans for a subscription-based on-demand service.

 

What are the biggest threats to SPOT’s subscriber growth? Can SPOT get control over content costs and improve gross margins? How can SPOT differentiate itself from rivals like AAPL and AMZN? Can SPOT become as dominant in streaming music as NFLX is in video? To answer these and other questions, Blueshift will gather data and issue a market research report from independent sources in the following areas: Record labels and publishers, Content creators and brokers, Competitors, and Industry specialists.

 

Companies: Spotify Technology SA (SPOT), Alphabet Inc. (GOOG/GOOGL), Amazon.com Inc. (AMZN), Apple Inc. (AAPL), Netflix Inc. (NFLX), Pandora Media Inc. (P), Tencent Holdings Ltd. (HK:0700)

 

Research Begins: July 9, 2018

 

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