Close

Not a member yet? Register now and get started.

lock and key

Sign in to your account.

Account Login

Forgot your password?

Spotify Idea Proposal (SPOT)

Spotify Idea Proposal (SPOT)
 

Will podcasts and artist services give Spotify revenue upside and set it apart from competitors?

Report Available: April 2, 2020

 

Blueshift’s ongoing research centers on questions about SPOT’s revenue and subscription growth prospects as its ARPU continues to decline. SPOT is investing heavily in podcasts but it is not clear whether the format can add meaningful advertising revenue or boost the platform’s appeal to consumers. The company is hyping its suite of artist services as a potential moneymaker, while competition in the streaming music industry remains fierce.

 

Observations

  1. SPOT’s headline numbers for Q4 were strong: Revenue was up 24% and the streaming music service added 11 million paying customers to reach 124 million, a 29% increase from a year earlier and up 10% sequentially. However, there were some troubling signs under the surface. Average revenue per user continued to decline, falling 6% year-over-year, as SPOT offers promotional plans and pushes into emerging markets with lower subscription prices. Further, the company forecast Q1 revenues that were below analyst estimates and slower-than-expected subscriber growth for 2020, a possible sign that it is getting close to saturation points in major markets like North America and western Europe.
  2. In a competitive market that includes deep-pocketed giants like AAPL and AMZN, SPOT continues to seek a level of differentiation outside of its highly successful curated playlists. To that end, the company has invested almost $600 million in the past year on assets related to podcasts, including its $250 million acquisition of Bill Simmons’ The Ringer. SPOT is counting on podcasts to boost ad revenue, bring in new subscribers and expand time spent on the app. However, SPOT only owns a tiny fraction of the estimated 850,000 active podcasts, and it is unclear how much revenue upside podcasts can offer. AAPL, for example, is the podcast leader with more than 50% market share, but has not tried to monetize it.
  3. SPOT’s growth strategy also includes the development of a “two-sided marketplace” in which SPOT is trying to sell data, advertising and other services to artists and labels. Company executives have been talking up such an effort since SPOT’s 2017 IPO, but are just starting to roll out features, like the ability for artists to buy cost-per-click ads on the app to promote new releases. Spotify for Artists is an analytics dashboard offering location-based streaming data and other information. The company said in its most recent earnings call that the two-sided marketplace, combined with strategic licensing, added more than $30 million in gross profit during 2019.
  4. One of SPOT’s biggest challenges is that its major competitors do not rely on streaming music services for profits. AAPL offers music as part of its ecosystem to sell phones and tablets. AMZN offers a compelling free service to boost Prime memberships, as well as a series of paid tiers, including the recently-launched Amazon HD for higher-quality audio. GOOG/GOOGL’s YouTube music service is part of the company’s larger data gathering and ad strategy, and has the benefit of YouTube’s massively popular worldwide brand name. TME, which dominates the Chinese streaming music market, does not compete directly with SPOT, but its decision to make certain album releases available only to premium subscribers could put pressure on SPOT to follow suit, though earlier “windowing” strategies have not taken off. Meanwhile, ByteDance, the Chinese company behind the wildly popular TikTok app, is launching an on-demand music service that reportedly has some appealing social features.
  5. Blueshift’s March 20, 2019, report concluded that SPOT has not gained enough negotiating leverage to meaningfully reduce the royalty rates it pays to record labels. Since that report, SPOT has signed several deals with major labels and told investors not to expect significant changes from past agreements. Blueshift’s report also said labels are concerned about the continuing decline in SPOT’s revenue per user. Sources said, however, SPOT could gain some negotiating power by providing the labels with more of its highly valuable user data or by increasing the revenue pot by raising its subscription prices, possibly with a more expensive tier for higher-quality audio files.

 

How much subscription upside does SPOT have in the U.S.? How about in global markets? Will podcasts add meaningful advertising revenue? Can podcasts expand listening hours and give SPOT more leverage with labels? Will SPOT’s artist services be popular and produce significant revenue? How is the competitive landscape changing? To answer these and other questions, Blueshift will gather data and issue a market research report from independent sources in the following areas: Record label executives, Music publishers and brokers, Competitors, Artists and podcasters, and Industry specialists.  

 

Companies: Spotify Technologies SA (SPOT), Apple Inc. (AAPL), Amazon.com Inc. (AMZN), Tencent Music Entertainment Group (TME)

 

Research Begins: March 16, 2020

 

 

 

 

To see other ideas Blueshift Research is currently working on, please click here.

 

 

Blueshift Research’s sister company, Intro-act, has launched the Intro-act Scorecard, the C-suite’s standard, ongoing measure of corporate investor engagement.

 

The Scorecard optimizes the ROI on corporate access by measuring: Concentration, Directionality, Breadth, Impact, Depth, and Duration

 

See the sample Scorecard. Watch the Scorecard video.