Disclaimer: I worked for a Spotify competitor in the past, so i have a pretty solid understanding of how the business works.
I think it is a bad investment for one simple reason: Spotify purchases its main product (music) from a oligopoly. I'd estimate that 95%+ of the tracks streamed (by total playtime) are from one of the 3 major music labels: Universal, Sony or Warner. That includes sublabels that in some cases may have a seperate deal with Spotify, but at the end of the day are still part of the big 3. Imagine you are a Sony executive, walking by a news stand and the Wall Street Journal Headline is "Spotify Q2 earnings 30% up". What are you gonna do? You will squeeze them, make them pay, just enough that they survive. And Spotify has zero negotiation power here. If Sptify fails to have a deal with any 1 of these 3 labels, they become useless overnight. People will switch to Apple Music, Amazon PrimeMusic, Tidal or any other service quickly. It doesn't matter if Spotifys app is slighty better than the competitors software if they lack 1/3 of the music.
All Spotify needs to push the big labels back on their heels is to sign a few top 40 artists of their own.
I might be wrong but I remember reading something like 90%+ of streams on music services are of songs currently on the charts. Capture the popular culture like Netflix has and the labels will start rolling over on rates.
I would say that the jury is still out on that. Lack of Blockbuster movies has always been one of the weak points of Netflix, and they are still in the process of getting started with producing content there (with "Bright" being one of the first of their movies trying to be a Blockbuster).
On the other front, they are highly dependent on existing content that people love, and more and more of that is being owned by Disney and pulled from the platform as they are gearing up for their competing service. If they also fail to keep the other big right holders on the platform then soon all they have will be Netflix content (which is probably their 5-10 year plan anyway since that makes them more profitable).
I'm not sure a Netflix Originals-only catalog will go over well with the subscriber base. Despite some of their first original content having some good hits (e.g. House of Cards), I think over time their hit-rate pretty much adjusted to the levels of traditional cable channels like HBO/Showtime with a lot of mediocre content.
No way that's going to work. Music is VASTLY different from video. In video it takes more time and resources to produce each one and replays are rare. In music everything is super cheap to produce and replays are off the chart.
If Spotify became their own label and signed 100 of the top artists, their old songs are STILL with the previous label and will likely never leave. Spotify still NEEDS those songs or it's SOL.
Netflix has this problem too but they “solved” it by making their own content. Amazon are Google are doing the same thing. That’s the direction I see Spotify going, though I wonder why Apple hasn’t done this yet.
Serial TV is consumed like a novel, as long as the next episode is available, the availability of everything else is unimportant. Music is consumed in a much more random access pattern, like a lexicon: if the letter M is missing, it's broken. ("You want that particular song by Morrissey? Sorry. Be sure to check out these five Spotify Originals that have also been tagged with #sad" - no, people won't be willing to pay for that)
Let's take a second here. What will happen if Spotify signs new artists and effectively becomes their own record label?
It will start off normally, but eventually (or possibly from the start) Spotify will not allow this music to be streamed anywhere else. It will be exclusive to Spotify, the same way Netflix has done with their originals.
Now what happens? Users are forced to pay for multiple music streaming services, just as happened with the video streaming industry.
This is already a huge burden on users of video sites (and makes piracy a much more appealing option), but is not even acceptable in the music industry. Users create playlists with their own songs, and will want specific songs.
Even with your 90% statistic, which may or may not be true, the other 10% is still very important. I'd imagine that hit songs are streamed more often comparatively but older songs are more important.
Hopefully this fracturing doesn't happen, but if so (as I said) piracy certainly looks more appealing. Especially with Google Play Music allowing you to upload your own music..
The other week, my kids were watching TV and my wife and I were in the kitchen and one of them yelled out, "Mom, something popped up on Netflix saying the price is going up. What should I do?" My wife and I said the same thing instantly: "Just hit okay." We didn't even know what it went up to...hell I don't even know what it cost before. Pricing power is a helluva thing. Why does Netflix have this power? Because people love it. Because it's a part of their lives. Because people are habit-forming. And Spotify fits this mold pretty well...maybe not as strong as Netflix but still impressive. I think there are millions of Spotify customers out there [raising hang] who couldn't fathom going back to pre-2011...it probably makes them hyperventilate. Spotify could probably charge 2-3x what they charge today and I'm really not sure it would affect subscriber counts.
Remember a couple years ago when Amazon raised the annual Prime fee from $80 to $100 and no one cared? Yeah, kinda like that.
Buying from an oligopoly probably won't matter much here. Apple quickly blew those businesses up in the 2000's. The other problem is that the music industry suffers (like many other industries) from the 80/20 rule: a small group of artists are responsible for the vast majority of the profits. (Actually, I think the music biz is even more lopsided) It creates a weird dynamic for the labels and ultimately gives purchasers like Spotify more power. Consumers don't know anything about music labels - maybe not even their names - but man do they LOVE Spotify. Those kinds of things tend to be good investments.
You and your wife both know (subconsciously at least) that people will switch to HBO, Hulu, or any other number of services if Netflix gets unreasonably expensive. It's broke college students that buy Netflix the most, and they would have to get rid of their biggest set of subscribers to raise prices significantly.
Spotify on the other hand, doesn't have the issue of content being removed from it in the same way. Additionally due to the legacy of radio, there is a generally accepted amount that you should pay per play. This continues to the fact that spotify could over time expand into other areas of the music industry such as being a platform for artists to sell merchandise and concert tickets which is the most viable way for small artists to make money.
I see your points and I think they are very real. Streaming is one of the biggest sources of revenue today for the major players. Territories in music industry is what's squeezing business like Spotify. You can have a deal such that Warner has exclusive right in North America for all licenses, and can then sell to Spotify. Then perhaps another deal is reserved to a Sony-owned label in Eastern Europe. So if Sony doesn't want to sign the deal with Spotify, sure, Greek users may never get to play that song on Spotify.
I remember jumping from Apple Music and YouTube to Spotify because Spotify offers by paying monthly subscription, I have instant access to many music catalogs. Unlike Apple Music, I had to pay $0.99 or whatever per album/song. I am not sure if that has changed since, but it was the #1 reason I left Apple Music.
Since the Big Three has made so much more from streaming deals, they are going to choke Spotify's throat, but also have to deal with Spotify. After all, there is a solid and a strong growth of active users on the Spotify platform.
Big Three will flex muscles, but they won't just let the deal fail. Both sides need the revenue desperately. Netflix is in the same position but it has been producing its original contents so Netflix is less dependent on outsider producers. I think Spotify will do the same: create its own label and production companies, sign artists and make deals with the Big Three at various levels. Perhaps even buy a show ticketing company. Maybe begin to create a broadcast and video platform.
Warner Music Group's owner (Access Industries) is an investor of Spoifty (Access Technology Venture is owned by Access Industries which owns WMG). There's a humor whenever I look at music industry: we play the game of music chair, because your ex-worker might just show up to your conference call the next day representing another music company. Since artist X may have separate deals with separate labels (which in turns separate music recording companies), or because WMG needs Sony's help in India or whatever, in conclusion everyone has a stake in Spotify at the end of the day, even if you are not a direct investor of Spotify.
Unfortunately, every dollar collected is split up 50 times just because it takes many parties to publish a music and then collect the money. Everyone wants a piece, and everyone will have a piece. The pie might be small, but just enough to feed.
https://25iq.com/2017/12/30/moviepass-premature-scaling/
Given that music is generally not a substitutable good, margins can only be so strong on the core streaming product to your very point. I'm not really aware of any other revenue stream they may have (do they do ads?) and am curious what they might propose. Presumably they do have enough scale to be possible successful with something tied to monetizing their user data whether through ads or some other value-added service?
Apple, Google, and Amazon can afford to lose money all day long on the music streaming services that they each offer. This is because the services bolster their broader ecosystem of services and products whose aggregate value is far greater than any individual piece on it's own.
That's why Spotify is in a precarious position because streaming is it's only bread and butter.
Similar to UberEats + Uber versus a standalone service like DoorDash or Postmates. Uber doesn't need to make money on UberEats in order to be a successful business. Postmates does and that's a huge problem because delivery is a brutal business.
I believe the recently announced lawsuit, coming right before this IPO, may be a fine example of exactly what you're describing.
How do these other services operate in contrast?
really? with their endless amount of listener history and preference data. IMHO Spotify has gained the upper hand.
Rap Caviar, a playlist curated by Spotify, is making music into hits: http://www.vulture.com/2017/09/spotify-rapcaviar-most-influe...
Maybe it'll scratch your itch, figured I'd share.
That and the abysmal queue handling make me wish rdio was still around.
Their App is tricky to use (easy to skip, rather than enque a song, or accidentally skip while looking at meta data, or searching for tracks to queue).
They have offline working, half-decent play lists (but still too easy to accidentally make a new list, rather than augment an existing one).
However - "everyone" knows it, and knows favourite songs on it, and have an active account - so it's nice at parties, or for sharing tracks in person or via messages, tweets/statuses etc.
The only other thing I'd like to see was a steam/sdk integration for soundtracks in games. Everyone listens to their own music with any (mmo) game worth playing - but it'd be nice to have Spotify cross-fade to the "scary/dramatic" playlist in a fight, and "moody" when the game calls for quiet mood etc.
https://www.reuters.com/article/us-spotify-lawsuit/spotify-h...
Has spotify really been playing these major artists without permission? Or is there more to the story?
Not unusual to file for 10x what you think you might collect in the end. If there really are damages, will Spotify just give them 160 million in stock?
I guess as an investor, I don't see why I'd buy Spotify shares from an existing shareholder -- my "investment" is not going to the company, it's a bit like buying shares on the market of a mature company, except Spotify isn't that -- it's a money-hole with a highly questionable future. Is there any reason for someone to buy existing shares to expect things to turn around? They aren't getting a capital infusion, it's business as usual except with the additional burden of being a public company.
Of course, if everyone has too optimistic a view on Spotify's future success (could well be the case, I don't have an informed opinion) then buying the stock is a bad idea. But there is not necessarily anything sinister going on when founders/early investors cash out. From Spotify's point of view, they have an inventive to keep these people happy, balanced against the greater regulatory/oversight costs that you highlight.
Spotify is going public largely due to terms they agreed to in previous funding rounds, but they are probably not raising money because they either don't need it or believe they can get better funding terms.
If anything, this should be a signal that the company thinks the public stock is under-priced.
How are these two comparable? When Apple IPO'd back in 1980 you were buying stock from Apple.
>"...but they are probably not raising money because they either don't need it or believe they can get better funding terms."
They lose hundreds of millions of dollars year over year, why would they not need it? Also why would they believe that they can get better funding now when they resorted to selling debt with unfavorable term intheir last round of financing?
This allows them to cash out and then go sue Spotify for all the stuff they were previously lenient with.
They will no longer have vested interest in the company and no reason to protect it.
[1] https://musicindustryblog.wordpress.com/2017/11/03/announcin...
Like say if the lawsuit cleans them out, does being a publicly listed company vs a private one make for a different outcome?
Looking to hear from someone who’d have some domain knowledge on this stuff.
EDIT: Or possibly the other way around, does this allow them to finance the costs of the lawsuit?
Amazon, Facebook, Alibaba are some popular examples you might want to read about.
No domain knowledge btw, just seen it happen a couple of times before
For eg. Spotify had to lower their price from $10 per month to $15 per month for 6 (family plan) because Google Play Music offered that price point along with YouTube Red. Of course, neither Google nor Apple need to make money from their music services. Funnily or sadly enough this is true for almost everything Google does other than Ads.
Most people would agree that Spotify is a better music player while each of Google's music apps are bad in different ways, but online subscription services are a market where people want to nickel and dime.
>Most people would agree that Spotify is a better music player while each of Google's music apps are bad in different ways
I am not so sure about that. Spotify is on top of its game : adjusting the loudness of tracks, using ogg, .. I am however pretty sure that to almost all the users, it makes no difference.
Furthermore, it is very hard to differentiate as a music service. Most of the features are present in all the services (albums, playlists, AI generated recommandations, radios, podcasts, etc) .
Regarding the price, it is up to Spotify to start creating its own content in order to make it go down. Right now the real issue IMO is that the majors are dictating an extremely high monthly price for the service.
Seems really hard to build a sustainable music-streaming business when all major competitors can simply subsidize this rather complementary part of their business (AZ, Apple, etc.).
I'm not convinced they can do anything else successfully to be honest. At least I'm not impressed with some of the newest stuff like podcasts.
This seems much more like a forced IPO to get someone cashed out than the typical IPO to raise funds.
One thing to remember if you are investing, is that there will almost certainly be no restrictions on selling stock, meaning that employee's, C-level execs and early investors won't have the typical lock up period.
And since they aren't using an underwriter, there is no back stop for the shares sliding on the first day of trading.
This doesn't do a whole lot to inspire confidence in the company, Look for the CEO to make an announcement that they will be holding their shares, or be prepared to buy into a company while the people on the inside are getting out of.
As a user, I'm really excited for them, as an investor not so much. Hopefully they'll release some good news leading up to their IPO which could be as early as March.
(http://www.sramanamitra.com/2017/03/08/2017-ipo-prospects-sp...)
I had an offer on the table from them in 2011 but decided to go with Amazon instead. I'm always curious how the road not taken would have turned out.
From both my experience and that of folks I've spoken with, the last year or two has been quite good for us. That said, you're probably much better off financially if you accepted an offer from a FAANG-type company around the same time and stuck with them.
https://www.inc.com/jeremy-quittner/lawsuits-can-sink-an-ipo...
Not releasing it as planned could very well be worse. It could easily be seen as an implicit acknowledgment that the plaintiff has legal standing, and that their claims have merit. This could then lead to a situation where an IPO would have to be delayed, potentially for years until it all has been played out in court.
I'm quite sure most potential investors will assume that this particular suit is likely to be timed based on rumors of the IPO to interfere maximally with it. Maybe in the hope of either a quick settlement or to effectively create an out-of-court punishment via lowered IPO valuation to deterr others from trying to manuever the legal terrain in a similar way as Spotify is claimed to do. Whether the plaintiff has standing or not.
Going forward without deviating from schedule, or even quicker than schedule, sends what is probably the strongest possible message that could be sent to bolster the IPO and minimise value loss. It says: "We're not afraid of this suit"
Risk estimates in preparation for an IPO regarding a company like Spotify almost certainly includes assesment of risks by various actors that might want a piece of the cake through legal action.
For comparison, Vivendi/Universal is at $35B (based on its share price) with 20K+ employees in multiple divisions vs. Spotify in just the music streaming business with 1600 employees.
More artists are publishing their music independently. I think the negotiation power of older records owned by record labels will diminish because the next generation of independently owned records will outweigh them.
The thing I'm unsure of is how Apple Music vs Spotify is going to play out. I feel that Spotify is currently an overall better product but Apple has had major cultural impact with its curation which IMO is more valuable than building software.
