It’s based on the potential for significant growth in streaming, and price increases. The major labels and Spotify agree that the price should be increased regularly - after no uplift for a decade - and as more countries begin to adopt streaming the labels and Spotify see significant potential for growth.
The CEO of Warner Music Group - the smallest of the three majors - Robert Kyncl, ex-YouTube exec, said on the company’s most recent earnings call that he believes the penetration of cable TV and SVOD is a good indicator of streaming’s potential, and currently subscription music streaming is lagging behind.
There is explosive growth in some countries that were until recently delivering little: for example something like 95% of Brazil’s recorded music revenue comes from streaming. That’s happened in a pretty short period of time.
There are currently fewer than 1 billion paying streaming subscribers across all platforms globally, but 1 billion is close. It will have taken around 18 years to reach 1 billion paying subscribers; I wouldn’t be surprised if we hit 2 billion in a third of that time. So by 2030 or shortly afterward there may be 2 billion paying subscribers and it’s likely that Spotify will continue to have the lion’s share of those.
It has deep relationships with the major labels and can use high value subscribers in developed territories to subsidise adoption in developing makers.
According to Daniel Ek, Spotify’s CEO, in the US and some major European markets the company has significantly pulled back on marketing spend, but that hasn’t really harmed acquisition - plus a lot of consumers are going from account creation to paid subscription without converting through ad-supported.
Penetration in the biggest markets is still well under 50% of the population - around 30% to 35% - compared to 50% penetration for cable TV and SVOD.
I agree that the valuation seems detached from reality - but the last three quarters have helped build people’s expectations, and the share price has gone from around $170 a year ago to $450+ more recently.
Whether it can sustain that remains to be seen, it’s a crazy multiple, but the relationships Spotify has with the major labels give it a most that makes it hard for new regional competitors to launch, and its overall offering - and marketing clout - makes it hard for established regional competitors to compete effectively.
