To Buy Spotify?

Posted: December 31st, 2018 | Author: | Filed under: spotify | No Comments »

To buy Spotify or not to buy?

One one hand, it meets my general criteria for buying stock well. Here are my current individual holdings and my rubric for determining if a stock is worth the risk. SPOT compares well to my other holdings.

My Love

I use Spotify every day and have so for years now. It’s a part of my everyday life and has improved it. Spotify is easily worth the $9.99/month.


Daniel Ek, the founder and CEO of Spotify, has shown great leadership (and I prefer founder-led companies). Daniel is product and tech first. Daniel has done a great job delaying gratification and continues to invest in the long-term.


This is the biggest drawback. I prefer to invest in companies that make a profit.


Spotify isn’t quite making a profit yet but their cash burn is controlled and they are close to sustained profitability. The hoard of cash left over now should begin to grow and allow Spotify to acquire.


Considering the total addressable market of the entire world, Spotify’s potential is the sky. That being said, Spotify doesn’t have a 10 in this category because of its marginal costs.

Spotify’s potential is is close but not quite like Google, Netflix or Facebook because Spotify is not a complete aggregator.

What is an Aggregator?

As Ben Thompson defines it, an aggregator has the following characteristics –

  1. Direct Relationship with Users
  2. Zero Marginal Costs For Serving Users
  3. Demand-driven Multi-sided Networks with Decreasing Acquisition Costs

Unfortunately, Spotify doesn’t qualify as an aggregator as defined here. Spotify’s marginal costs for serving users music is around 52% per song.

Spotify is well aware of this and is working effectively to reduce marginal costs. As Spotify’s influence grows they gain leverage with the three major record labels. But more importantly, the marginal costs can be significantly lowered by signing deals directly with artists, as they have started to do.

But music is unique. Unlike news articles and TV, the backlog of music is as much, if not more, important than the new music. This gives the record labels a stronger position with negotiations and, at least currently, limits Spotify’s gross margin.

Macro View – Competitors

You don’t have to be an aggregator to be a great business but Spotify has other existential threats. Daniel Ek wasn’t the only person who recognizes how big this streaming opportunity is.

All of the big dogs are in the game. Apple, Google, and Amazon. And many smaller but unique threats – Sirius, Tidal, iHeartRadio, and Soundcloud.

Apple, Google, and Amazon all have deep pockets and distribution methods for their streaming services.

Apple distributes Apple Music by pre-installing it on every iPhone it sells. Pre-installed apps have a leg up over many competitors simply due to the friction of downloading another app. Google and Amazon have numerous ways to distribute their streaming services, with their hit smart speakers being their most successful.

The others all bring something unique to the game as well. Sirius has much more original content, a more radio-like experience, and has a solid car distribution strategy. Soundcloud is doing a great job capturing the young, upcoming artists.


As of now, despite my bullishness, I’m standing on the sidelines with buying $SPOT. The waters are too bloody for me, too much competition with too many threats.

But that may change. Unlike Apple, Amazon and Google, Spotify is not a small side product for Daniel Ek and company. Spotify’s greatest strength against these top dogs is to stay laser beam focused on creating the best streaming music experience for listeners and creators.

If Spotify continues that mission while getting their marginal costs down through leverage with record labels and signing artists directly, I’ll start piling up the stock.

Spotify, One Product, Two Models

Posted: November 30th, 2018 | Author: | Filed under: Product, spotify | No Comments »

Spotify is awesome.

As a consumer, having a giant library of music spanning hundreds of years available at your fingertips is a pleasure.

As an investor, Spotify is addressing a universal human problem. How can a person listen to any music any time they want? Music is ingrained into our DNA. Everyone loves music. Spotify’s total addressable market (TAM) is the entire world. Google, Facebook, and Amazon. Those are the businesses that scale the best.

Beyond the giant TAM, Spotify is attractive as an investor for its business modal. Spotify has a diversified revenue stream. The much-criticized targeted ad model and the much-beloved subscription model.

As a product person, on the other hand, having one product with two business models is a nightmare. Making product decisions that can satisfy both business models is a hell of a challenge.


Spotify uses ads to monetize their 109 million ad-supported users. In Q3 of 2018, Spotify pulled in 143 million euros from ads. This breaks down to 1.31 euro per ad-supported user. Ad-supported tech companies is nothing new. Facebook and Google make over 90% of their revenue from ads.

That being said, ads are a lightning rod for criticism. In order to serve the most effective ads, data of users must be harvested to allow targeting. This harvesting of data can be perceived as creepy or worse, can be exposed in a breach, damaging reputation. This has most recently played out with Facebook and its stock price is suffering.

Furthermore, many like to think that in an ad-supported business model, the user IS the product. The user’s attention is being sold to advertisers.

That sentiment is extreme but has a grain of truth. The company’s interests can become less aligned with the users’ interest in an ad-driven model. Users may tolerate an ad, perhaps even benefit from it, but it’s not something a user would opt in to. The key here as a product manager is to match the best ad to the user and to find the sweet spot of ad inventory that doesn’t alienate the user.

Spotify is using their self-serve Ad Studio to power their ad business. Like Facebook before it, Spotify is allowing customers to target specific users based on data. An advertiser can target a user based on their age, gender, location, activity, and music taste.

This set of targeting options pales in comparison to Facebook’s. The limited targeting options and the mostly audio-only ad inventory is reflected in Spotify’s Average Revenue Per User (ARPU). Facebook pulled in $6.09 per user in Q3 2018 compared to Spotify’s $1.48 ad-supported ARPU.


Ad-supported business models are more controversial than subscription business models, which tends to better align the company and user.

The good news for Spotify is their 87 million premium subscribers generated the vast majority of their revenue. Nearly 90% of revenue in Q3 came from subscriptions.


With the risks of an ad-supported business model and 90% of revenue coming from subscriptions, the strategy to focus first and foremost on the subscription business appears clear.

Spotify can appeal to everyone and therefore it’s important for Spotify to always have a free tier. This free tier, supported by ads or not, should be treated like other freemium models – as a way to give people a taste of the product and to entice them to upgrade to the premium tier.

Unlike Facebook, who only has an ad-supported tier, Spotify should treat their ad-supported business model as a second-class citizen. Spotify should never sacrifice the product to make more ad money. Spotify should optimize the free tier to entice users to upgrade. Unlike most ad-supported models that are finding the sweet spot of ad inventory and user alienation, Spotify needs to purposefully alienate the free users enough that they will be enticed to upgrade, but not leave Spotify for a competitor.