Spotify
Thesis
- The verdict: Spotify's variable cost model is less scalable than Netflix's (content amortization) and YouTube's (free cost plus revenue sharing), and is subject to supplier shock.
- The only un-commoditized player in the commoditized music distribution industry, due to scale and a defensive data moat.
- Moat: scale, behavior data and recommendation algorithm, negotiating power with rights holders, demonstrated pricing power versus Apple and Amazon (but repricing is not an annuity).
- Business model: Prepaid monthly float / negative working capital. Capital light. No debt.
- The "data moat" is real (given the behavioral density and demonstrated by Spotify taking share from Apple Music), but is a defensive one (useful for user retention and price negotiation with suppliers. It keeps a commodity product from being commoditized. The data can reorder a shelf but cannot change it). YouTube's (for better ad targeting) and Netflix's (for better content decisions) are offensive. Spotify discloses no churn rate so the figures cannot be verified.
- Challenges
- Royalty renewal asymmetry amplified by MFN clauses.
- The per-user royalty floor collides with EM growth.
- Podcast no longer a growth engine and has been losing share especially to YouTube, with the market migrating to video format and podcast advertising becoming commoditized (no lock-in).
Reports
Reference
UMG, WMG record labels and the music industry opportunities and challenges
- Each transition, from album to owned track to streaming, better aligns payment with value (song popularity).
- Music labels are goldmines of IP. They have less of a grip on discovery, but are still in the best position to promote talents and help them maximize the value of live appearances.
- The focus of competition in streaming: for video it's content differentiation; for music it's user experience and technology differentiation (content is a shared commodity).
- Spotify can extract value from its subscriber base via other means, such as marketplace.
