A thank you to Carnegie for a level-headed analysis of Spotify, but there are still some issues even so:
1. They are still losing money; I don't believe they've *ever* made money. They may be able to keep going like this for quite a while yet (see also Amazon), but it will catch up to them eventually unless they massively increase the advertising or data-selling revenue, and that will degrade the user experience.
2. They have not figured out how to convert free users to paid users, even though they've been around for eight years now. That's a long term problem.
3. As noted by EsquireCats, they give away too many promotional/discount/free premium accounts. Here in Canada, you buy an expensive smartphone you get a Spotify premium account for "free" from most carriers. Doing the same thing worldwide is costing them dearly.
4. Apple Music is growing faster than Spotify. And then there's the biggest issue:
5. Spotify doesn't pay properly for its content. AI ran a story about the lawsuit against Spotify that runs to a few billion $ in owed royalties. Assuming the win even a partial victory, Spotify will be even deeper into the red.
I'm all for competition and am genuinely glad there's a close competition between the two services to keep each other on their toes, but Apple has zero of these same problems. I'm not saying Spotify is dooooomed, but it will need to make huge changes in the fairly near future in order to remain competitive against Apple Music.
You're welcome.
There are certainly concerns for Spotify going forward. But to address specially points you raise:
1) Spotify is still losing money, yes. But its operating losses, which are what matter most when it comes to assessing the viability of its business model, aren't that large. And two important things are that it now has good (and improving) gross margins and good scale. It makes money on incremental customers.
It still losses money because it continues to spend a lot to try to grab market share now, while the market is exploding, rather than trying to grab it later. Grabbing it later will be more expensive and more difficult. This is a market where the differentiation between competitors isn't going to be great - e.g., pricing will be similar, content will be similar. So there will be a strong tendency for customers to stay with a service they're using and like. Pulling customers away from a competitor will be harder than getting new-to-the-market customers is. So Spotify is doing what it should do, if it has the funding it needs to do it: Spending a lot now to build for greater future success, rather than trying to show a profit as soon as possible.
2) I'd say they have been able to convert free users to paid users. That's part of what has allowed them to grow paid users so much. They still have a lot of free users, and not everyone converts, but that's to be expected. They don't need every free user, or even a majority of them, to convert. It's just one way in which Spotify brings in paying customers; it's one aspect of Spotify's marketing efforts. And Spotify now has positive gross margins on its free service. So even without a huge conversion rate, the free tier can be a cost effective marketing tool.
3) Yes, that represents a significant marketing cost. As I suggested, Spotify continues to spend a lot on marketing to build as much scale as it can now. That should pay off down the road. Also, the kind of deals you refer to may not be costing Spotify as much as some people assume. Spotify isn't necessarily, in effect, paying the full cost of those giveaways itself. It has deals with other parties where they buy service (in bulk) at discounted rates so that they can give Spotify service to their customers.
4) That may be true, and Apple certainly has some advantages over Spotify just as Spotify has some advantages over Apple. But there's likely enough room in this growing market for both of them. Even if Apple is growing faster, Spotify still has strong growth and already has great scale.
5) That's an ongoing concern. But I don't expect that lawsuit to be crippling for Spotify. I expect a settlement will be reached at a much more manageable number. But generally speaking, Spotify is in a better position now when it comes to content costs. They are going down in part because Spotify has more leverage in negotiating licensing terms and, even with better deals for streaming services like Apple Music and Spotify (i.e. even with them keeping a larger portion of streaming revenue), music industry revenues seem set for growth. That hasn't been the case for a long time.
I wouldn't invest in this stock. Too much competition from the big guys: Apple, Google, Amazon...Going against these guys will be kiss of death sooner or later.
They can't cutoff the free users, and their overall numbers would drop quite a bit. Making their value look much worse. Instead of saying they have 170 million active users, it turns into 70 million active users. That wouldn't look so good.
Free users cost money. Spotify has to pay the royalties even if the end user doesn’t through a subscription. So it boils down to how many of those free users eventually become subscribers.
Spotify has content costs for its free tier, yes. But generally speaking those content costs depend on the revenue generated. Spotify isn't paying rights-holders nearly as much for ad-supported customers as it is for paid customers. There's an order of magnitude, or so, difference.
And Spotify had a positive gross margin for its ad-supported service in 2017. So that tier isn't costing Spotify a lot. It's likely a cost effective marketing tool, even if the conversion rate isn't high.
If I were a potential investor, seeing that 1.5 billion dollar net loss, would incline me to keep away! I also reckon that Apple Music is working at a loss too. Luckily for them Apple has other much more profitable streams of income to back it up.
I would hope that someone considering investing in Spotify (1) had the ability and (2) took the time to understand the reasons for that reported loss. For instance, was it mostly caused by a business model that just can't work or the result of accounting rules? Was it mostly from, e.g., operational losses or finance costs? I'm not really considering investing in Spotify, but I've still taken the time to understand what's going on with Spotify's financial results beyond a few reported numbers.
I won't get lost in the why of it and in how the accounting for such things works (though I can expound somewhat if some are interested), but most of the increase in Spotify's reported loss for 2017 was the result of the value of its shares increasing. It shows up as a loss for financial reporting purposes, but it doesn't represent the kind of real world loss that most people think of.
I wouldn't invest in this stock. Too much competition from the big guys: Apple, Google, Amazon...Going against these guys will be kiss of death sooner or later.
They can't cutoff the free users, and their overall numbers would drop quite a bit. Making their value look much worse. Instead of saying they have 170 million active users, it turns into 70 million active users. That wouldn't look so good.
Free users cost money. Spotify has to pay the royalties even if the end user doesn’t through a subscription. So it boils down to how many of those free users eventually become subscribers.
Spotify’s bi-annual ‘trial’ campaigns which offer a free (or $0.99-for-three-months) taste of its premium tier. These trials accounted for 27%, 23% and 20% of added premium subscribers in 2015, 2016 and 2017 respectively.
And how many subscribers dropped the service over the same time period? What’s the churn rate?
Comments
There are certainly concerns for Spotify going forward. But to address specially points you raise:
1) Spotify is still losing money, yes. But its operating losses, which are what matter most when it comes to assessing the viability of its business model, aren't that large. And two important things are that it now has good (and improving) gross margins and good scale. It makes money on incremental customers.
It still losses money because it continues to spend a lot to try to grab market share now, while the market is exploding, rather than trying to grab it later. Grabbing it later will be more expensive and more difficult. This is a market where the differentiation between competitors isn't going to be great - e.g., pricing will be similar, content will be similar. So there will be a strong tendency for customers to stay with a service they're using and like. Pulling customers away from a competitor will be harder than getting new-to-the-market customers is. So Spotify is doing what it should do, if it has the funding it needs to do it: Spending a lot now to build for greater future success, rather than trying to show a profit as soon as possible.
2) I'd say they have been able to convert free users to paid users. That's part of what has allowed them to grow paid users so much. They still have a lot of free users, and not everyone converts, but that's to be expected. They don't need every free user, or even a majority of them, to convert. It's just one way in which Spotify brings in paying customers; it's one aspect of Spotify's marketing efforts. And Spotify now has positive gross margins on its free service. So even without a huge conversion rate, the free tier can be a cost effective marketing tool.
3) Yes, that represents a significant marketing cost. As I suggested, Spotify continues to spend a lot on marketing to build as much scale as it can now. That should pay off down the road. Also, the kind of deals you refer to may not be costing Spotify as much as some people assume. Spotify isn't necessarily, in effect, paying the full cost of those giveaways itself. It has deals with other parties where they buy service (in bulk) at discounted rates so that they can give Spotify service to their customers.
4) That may be true, and Apple certainly has some advantages over Spotify just as Spotify has some advantages over Apple. But there's likely enough room in this growing market for both of them. Even if Apple is growing faster, Spotify still has strong growth and already has great scale.
5) That's an ongoing concern. But I don't expect that lawsuit to be crippling for Spotify. I expect a settlement will be reached at a much more manageable number. But generally speaking, Spotify is in a better position now when it comes to content costs. They are going down in part because Spotify has more leverage in negotiating licensing terms and, even with better deals for streaming services like Apple Music and Spotify (i.e. even with them keeping a larger portion of streaming revenue), music industry revenues seem set for growth. That hasn't been the case for a long time.
Spotify has content costs for its free tier, yes. But generally speaking those content costs depend on the revenue generated. Spotify isn't paying rights-holders nearly as much for ad-supported customers as it is for paid customers. There's an order of magnitude, or so, difference.
And Spotify had a positive gross margin for its ad-supported service in 2017. So that tier isn't costing Spotify a lot. It's likely a cost effective marketing tool, even if the conversion rate isn't high.
I would hope that someone considering investing in Spotify (1) had the ability and (2) took the time to understand the reasons for that reported loss. For instance, was it mostly caused by a business model that just can't work or the result of accounting rules? Was it mostly from, e.g., operational losses or finance costs? I'm not really considering investing in Spotify, but I've still taken the time to understand what's going on with Spotify's financial results beyond a few reported numbers.
I won't get lost in the why of it and in how the accounting for such things works (though I can expound somewhat if some are interested), but most of the increase in Spotify's reported loss for 2017 was the result of the value of its shares increasing. It shows up as a loss for financial reporting purposes, but it doesn't represent the kind of real world loss that most people think of.