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Emerging Public Companies: Next Amazons (Part Four of Four)
Spotify – An audio super aggregator in the making
Spotify has been a difficult investment for many, simply because current share price is even lower than its direct listing reference price of $132 back in 2018. It is especially confounding, since as a business, Spotify is expected to more than double its 2018 revenue by 2022.
Investor Day 2022: More than Just Music Distribution
Amidst bearish market sentiment, Spotify hosted an investor day on June 8, 2022. Daniel Ek, co-founder and CEO, outlined how far its business has evolved since it became a public company. From its origins as a passive music distributor subject to the whims of major record labels, Spotify is now the world’s largest demand service platform and single most important revenue contributor to the recording industry. Not only that, with over 430 million users generating a plethora of first party data, Spotify offers valuable tools for labels to drive engagement for their artists. This has enhanced Spotify’s bargaining position vis-à-vis record labels as well as the profitability of its music business, similar to how Sponsored Products boosted Amazon’s e-commerce clout and margins.
Additional monetization channels have also been initiated to not only benefit artists, but also Spotify’s bottom-line:
“Beyond music, touring and merchandise are significant pieces of the equation. So we’re building solutions for both artists and fans, all while growing new lines of profit for artists and Spotify. We’ve integrated listings from top ticketing platforms to sell concert tickets at scale within Spotify. We’ve also enabled artists to sell merch, vinyl, and other offerings directly to fans via their Spotify artist pages through a custom integration with Shopify. And we’ve continued to make great progress with our Fans First program, which uses Spotify data to identify and reward the most passionate fans with exclusive offers, like advance access to concert tickets, exclusive merchandise, or invite-only events. To date, the program has generated more than $300 million in revenue for the music industry”
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Podcasting – Second Core Business
Spotify has become the number one podcast platform – surpassing Apple – since starting the business from scratch back in 2019. Today, there are more than 4 million podcasts available on Spotify, up from just 500,000 in 2019. Podcast revenue grew tenfold over the same period.
Podcast is expected to be a gamechanger in the coming years. While the most relevant music content – especially back catalogue – is owned by major record labels, key podcast content is either exclusive to Spotify or user-generated by disparate content creators. Spotify wants to reach a lot more independent voices in the coming years, aiming to become the YouTube of audio content to aggregate both supply and demand. With celebrity-driven podcast deals making headlines, more creators have joined the Spotify platform to reach its vast audience, much like how third-party sellers continue flocking to Amazon to reach its insatiable customers. Advertisers have followed suit – total advertising dollars are likely to hit almost $2 billion in 2022, thanks in part to the hypergrowth in podcast revenue:
“In 2021, we generated close to €200 million in podcast revenue. We expect this to increase materially in 2022, and going forward, we believe podcasting in itself will be a multibillion-euro business for Spotify”
Daniel Ek – The Man who beat Apple, Google, and Amazon in the Race for Audio Dominance
Behind all these pivots is Daniel Ek, a patient and strategic thinker who has outmaneuvered all attempts by Apple to crush the service. To understand Ek, I would recommend reading The Spotify Play.
Similar to Jeff Bezos, Ek is willing to play the long game – invariably at the expense of short-term profits – in establishing new business lines and doubling down on winning initiatives. To accelerate its podcasting business, Spotify has spent considerable sums acquiring Gimlet Media, The Ringer, Megaphone, and most famously, a rumored $100 million for the exclusive rights to stream The Joe Rogan Experience. Impressively, they have been carefully funded by internal cashflows from the music business, without raising equity or debt, aside from an opportunistic $1.5 billion convertible bond issuance in early 2021:
“We have generated positive operating cash flow in each year, including more than €1 billion in cumulative free cash flow—even while investing into new areas like podcasting. This has enabled us to finance more than €900 million in mergers and acquisitions while returning more than €600 million in capital to date over the past four years”
So far, the strategy appears to be working, judging by the engagement levels of podcast listening on its platform, as well as the flywheel spinning content creation, audience attraction and advertiser interests.
During the investor presentation in June 2022, Ek declared Spotify’s 2030 revenue target to be $100 billion, nearly 10 times more than what 2022 is expected to reach. Not only that, Ek aims to expand profitability alongside, demonstrating his confidence in Spotify’s powerful operating leverage as it scales:
“From everything I see, I believe that over the next decade, we will be a company that generates $100 billion in revenue annually and achieves a 40% gross margin and a 20% operating margin”
Spotify has come a long way, and judging by the Amazonian moves made in expanding its audience and reach, it should be on the playlist of growth investors seeking the next big thing.
Drop a comment if you have any other names on your mind.
(Author is long $SPOT)
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