March 10, 2020
Featured / Interviews / Media / Reviews

Spotify Hits 100 Million Premium Subscribers

It wasn’t long ago that Apple services chief Eddy Cue noted that the entire music industry had yet to hit 100 million paid subscribers. “We can’t forget that, as an industry, we still have very few music subscribers,” Cue told Billboard in late 2016. “There are billions of people listening to music and we haven’t even hit 100 million subscribers. There’s a lot of growth opportunity.” At the time, Apple Music had about 20 million paid subscribers and Spotify (NYSE:SPOT) had nearly 50 million.Spotify just hit 100 million premium subscribers all on its own.

Daniel Ek speaking on stage

SPOTIFY CEO DANIEL EK. IMAGE SOURCE: SPOTIFY.

Premium subscribers hit nine digits

The Swedish music-streaming leader reported first-quarter earnings this morning, including that milestone that was at the top of the company’s guidance, which had called for 97 million to 100 million premium subscribers. Total monthly active users (MAUs) climbed to 217 million, with ad-supported MAUs reaching 123 million. Remember that premium subscribers and ad-supported MAUs don’t add up to total MAUs due to some inactive premium subscribers.

Chart showing Spotify user growth over the past nine quarters

DATA SOURCE: SEC FILINGS. CHART BY AUTHOR.

Spotify launched in India in February, and the company says that 1 million users signed up within the first week before growing to 2 million users. It’s unclear how many of these users may be premium subscribers, but the majority are likely ad-supported MAUs.

Aggressive promotional activity and continued uptake of Family Plans helped push premium subscribers to the 100 million mark through ongoing offers for free Google Home Minis and a price reduction for Spotify and Hulu when bundled together. Promotions have been one of Spotify’s most potent tools in defending against Apple Music, which reportedly overtook Spotify in the U.S. market in February.

Financials in the first quarter

Total revenue jumped 33% to 1.5 billion euros ($1.7 billion), with premium average revenue per user (ARPU) of 4.71 euros ($5.26), roughly flat from a year ago but down on a sequential basis. Premium ARPU has been trending down in recent quarters, mostly due to shifts in product and geographic mix of the user base, but Spotify says the downward pressure on premium ARPU has now “moderated” and the declines for the balance of the year should be in the “low single digits.”

Chart showing premium ARPU trending down over the last nine quarters

DATA SOURCE: SEC FILINGS. CHART BY AUTHOR.

Most of the ARPU impact (75%) is due to product mix changes, with the rest related to “geographic mix and other factors.”

Gross margin came in above guidance at 24.7%, which Spotify attributed to strong premium subscriber additions, slower releases of original podcast content, and supply constraints around the smart speaker promotion.

Total operating expenses rose 30% to 420 million euros ($469 million), leading to an operating loss of 47 million euros ($52.5 million). Net loss was 142 million euros ($158.6 million).

Betting big on podcasts

Spotify’s minority stake in Tencent Music jumped to 2.3 billion euros ($2.6 billion), reflecting the 37% rise in those shares during the first quarter.

In addition to the two previously announced acquisitions of Gimlet and Anchor to expand into podcasts, the company also recently scooped up Parcast, which it is now disclosing it spent 50 million euros ($55.8 million) on.

The total cost for all three podcasting acquisitions was around 358 million euros ($400 million), which means Spotify has hit the low end of how much it had previously allocated for 2019 acquisitions ($400 million to $500 million).

What comes next

For the second quarter, Spotify expects MAUs to reach 222 million to 228 million, with premium subscribers of 107 million to 110 million. Total revenue should be 1.51 billion to 1.71 billion euros ($1.69 billion to $1.91 billion). Gross margin is forecast at 23.5% to 25.5%, and operating loss should be 15 million euros to 95 million euros ($16.8 million to $106.1 million).

Evan Niu, CFA owns shares of AAPL and Spotify Technology. The Motley Fool owns shares of and recommends AAPL. The Motley Fool has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. The Motley Fool has a disclosure policy.

Will Spotify’s “Investment Year” Pay Off?

The company’s 2018 investments paid off in 2019. Will its 2020 initiatives do the same?

Andrew Tseng

Andrew Tseng

(FutureCashFlows)
Feb 14, 2020 at 9:00AM
On Feb. 5, Spotify (NYSE:SPOT) reported fourth-quarter results that showed its monthly active users (MAUs) grew 31% year over year to 271 million. This marked the third straight quarter of accelerating MAU growth, and company founder and CEO Daniel Ek attributed this success to the work the company did in 2018 around product enhancements, innovation, and the free ad-supported service. Management saw strong leading indicators that these investments would work, but it took until last year for them to really pay dividends.This year, the company is ramping up investments in several areas, so much so that Ek referred to 2020 as “an investment year.” So what are these big investments, and when should they pay off?

Investing in podcast content

One of Spotify’s biggest investments this year will be original podcast content. This is a major area of focus for the company, because this content is owned by Spotify and can be monetized through advertising. More importantly, creating one podcast episode is a fixed cost, but the content can be listened to by a theoretically unlimited audience and sell many ad spots in the process.

That is a much more favorable business model than the company’s streaming music enterprise, one in which the content is controlled by major music labels. In that business, Spotify pays royalties to the music labels and publishers that amounts to a fairly high percentage of revenue. That’s a variable cost that increases in line with revenue, which makes it much harder to expand profit margins.

Reception desk at Spotify's Stockholm headquarters.

IMAGE SOURCE: SPOTIFY.

That’s why former CFO Barry McCarthy, who had previously been CFO at Netflix, explained late last year that “streaming was to Netflix as podcasting is to Spotify.” In other words, Netflix creates streaming video content with fixed costs that can help the company generate revenue from its entire subscriber base. In the same way, the cost of a given podcast is fixed yet it can help generate revenue from every Spotify user. The potential for improved profitability in both mediums is vastly superior to the royalty-based music streaming business.

Investing in sales and marketing

Last quarter, Spotify’s sales and marketing expenses grew an astounding 69% year over year. Those expenses made up 15% of revenue during the quarter, up from just 11% of revenue in the prior-year period. What drove up those expenses was the widespread promotion of the company’s free 90-day trial.

Management is willing to invest so much here, because many free trial users end up converting to paid subscribers. And those new paid subscribers generate far more value over their lifetime than the cost of the promotion. Spotify is rightly prioritizing the long-term value of the company over short-term profits. CFO Paul Vogel reaffirmed this notion during the fourth-quarter earnings call, “And when looking at LTV [lifetime value] to SAC [subscriber acquisition cost], nothing’s really changed. The numbers have been pretty consistent over the last year or two in terms of LTV-to-SAC ratio, so we feel really good about continuing to add users and valuable users.”

Investing in lower price

Spotify’s average revenue per user (ARPU) declined 5% year over year last quarter, which was larger than the low-single-digit declines it had been reporting earlier in the year. ARPU has drifted lower for Spotify for a number of reasons, one of which is the mix shift toward student and family plans, both of which are cheaper on a per-user basis. Another reason is the geographic mix shift toward lower ARPU in developing countries around the world. As those countries become a larger percentage of Spotify’s subscriber base, that puts downward pressure on the metric. Finally, ARPU was knocked lower in the quarter due to broader rollout of the free 90-day trials.

These ARPU declines are currently acceptable as management has prioritized user growth over pricing. Vogel elaborated during the most recent call, “At a high level, we’re still thinking about growing top of funnel. The most important thing for us is growing users and growing subscribers, and we’ll continue to stress growth over ARPU and profit in the short term.”

Ek has been reluctant to predict the precise timing of when these investments will pay off, but management is seeing the same sort of positive leading indicators that suggest the company is on the right track as it builds a profitable business long-term. That’s why investors should take Spotify into consideration, even during its “investment year.”

Andrew Tseng owns shares of Netflix and Spotify Technology. The Motley Fool owns shares of and recommends Netflix and Spotify Technology. The Motley Fool has a disclosure policy.

Why Spotify Is Buying Bill Simmons’ The Ringer

Just like that Playboy subscription, this isn’t really about the articles.

Stephen Lovely

Stephen Lovely

(Stephenlovely)
Feb 13, 2020 at 12:09PM
Spotify (NYSE:SPOT) is making an acquisition — one that may seem a little odd, at first glance, for a tech company that specializes in music streaming. Spotify has agreed to a deal with The Ringer, a sports and entertainment blogging site founded by Bill Simmons. Terms of the transaction have not been disclosed, but the sale has been reported by some media outlets to be valued at as much as $250 million.Simmons’ staff at The Ringer is full of talented sportswriters, but Spotify’s purchase was probably not inspired by any particular love of sports journalism. What Spotify really cares about is the popularity of Simmons himself with a certain type of sports fan — the podcast-loving type.

Baseball equipment in the grass

IMAGE SOURCE: GETTY IMAGES.

Bringing in The Ringer

Simmons has been a big name in sports media since way back in the early 2000s when he was better known by his moniker, The Sports Guy. He arrived at Disney‘s (NYSE:DIS) ESPN in 2001 with a popular column and soon became a force to be reckoned with within the sports media company. His columns and podcasts held forth not just on sports but on fandom itself, as well as plenty of other topics that were only tangentially related to sports, including movies and TV shows. Simmons eventually used his clout to found an online vertical dedicated to long-form sports journalism in 2011. That website, Grantland, met its demise in 2015, not long after a falling-out between Simmons and his old bosses at ESPN led to his departure from Disney’s sports media outlet. The next year, Simmons founded his own sports media company: The Ringer.

The Ringer has its fingers in a few different areas of media. There are the articles, which are the first things visitors to The Ringer’s site will notice — Simmons poached former Grantlanders from ESPN to build out an impressive roster of writing talent. The Ringer does videos, too, and has a shop full of merchandise for sale. And then, of course, there are the podcasts.

Simmons and his podcast empire

Simmons has been doing podcasts since way back in the mid-2000s when podcasts themselves were still a relatively new concept. Though some recent mega-hits have changed the popular perception of the medium, it’s worth remembering how ridiculous Simmons’ listenership numbers looked back in the mid- and late-2000s. In June 2009, for example, ESPN bragged that Simmons’ podcast episodes from that year had been downloaded more than 10.7 million times. That’s a pretty big number for a year when, according to the Pew Research Center, only 11% of Americans could report that they had listened to a podcast within the past month. Podcast mega-audiences are a more familiar concept now, but Simmons has stayed in the mix. According to Podcharts, Simmons’ podcast is the 38th most popular on the market, at the time of this writing.

Crucially, Simmons’ The Ringer has turned its founder’s podcast into a flagship offering that supports a growing empire of other podcast efforts. The Ringer’s “The Big Picture” podcast ranks 100 on Podcharts. “The Rewatchables” breaks the top 150. And those mentioned so far are just three of literally dozens of podcasts that The Ringer churns out — the site has podcasts covering everything from MLB and the NBA to popular films, celebrity gossip, and The Bachelor.

The Ringer reportedly earned more than $15 million in podcast ad sales in 2018. Though no one of its podcasts can match the success of a smash hit like Crooked Media’s “Pod Save America,” the sum total of The Ringer’s offerings reportedly earn it revenue in the same ballpark as what Crooked Media brings in — and The Ringer’s strategy is arguably more sustainable, given that it relies less on its top performer than does Crooked Media.

Spotify’s path to podcasting glory

All of this is a big deal to Spotify, which is very much in the podcasting business these days. There are a few reasons for this.

For one thing, hit podcasts are a path to “original content” of the sort that has been such a big deal in streaming video. A Spotify-exclusive podcast from Simmons would help Spotify differentiate itself from competitors like Apple (in fact, Apple’s streaming music service, Apple Music, doesn’t even have podcasts — Apple houses those separately in its Podcasts app).

Spotify would also save money — in the long run, anyway — by funding or buying podcasts that draw user listening hours away from licensed songs. Unlike Netflix and most other streaming video services, Spotify typically pays out royalty fees on a per-stream basis. If a Bill Simmons fan kills an hour listening to Spotify-owned Bill Simmons content instead of rocking out to Dropkick Murphys’ classic 2001 Celtic punk album Sing Loud, Sing Proud, then that saves Spotify some royalty payments. But it doesn’t work that way for Netflix, no matter how many people choose Netflix’s new Mark Wahlberg vehicle Spenser Confidential over licensed content like The Departed (2006).

Most important of all are the advertising implications. Spotify’s podcast success means a big leg up for the company’s targeted advertising platform. Podcast-listening habits, as it turns out, are more useful for building consumer profiles than music-listening habits are. Podcasts are a big help to Spotify’s targeted advertising goals. Besides, advertising within podcasts is the norm — which has allowed Spotify to get away with aiming podcast ads even at users paying for Spotify’s ostensibly ad-free premium subscription. And studies suggest that advertising during podcasts offers better returns than does advertising between musical tracks, perhaps because the former is more likely to find “active listeners.”

All of this is why Spotify has been moving to acquire and develop original and exclusive podcasts for months now. Acquiring The Ringer will be the latest such move — and, given Simmons’s podcasting muscle, the biggest one.

Music to Spotify’s ears

It’s impossible to say right now if Spotify will be a good steward of The Ringer’s non-audio mission. Simmons himself has been willing to fight for his writers in the past, so perhaps that’s a good enough reason to believe in The Ringer’s other projects. Members of The Ringer’s writing staff, however, are already sharing concerns with the press. From the perspective of Spotify and its investors, though, the fate of writers and videographers is very much beside the point. What matters is that Spotify appears to be securing its most promising podcast content yet, a move that fits nicely into the strategy the streaming giant has been pursuing in recent months.

Stephen Lovely owns shares of Apple and Netflix. The Motley Fool owns shares of and recommends Apple, Netflix, Spotify Technology, and Walt Disney and recommends the following options: long January 2021 $60 calls on Walt Disney and short April 2020 $135 calls on Walt Disney. The Motley Fool has a disclosure policy.

Here’s How Much Spotify Is Paying for The Ringer

The podcast shopping spree has now cost over $600 million.

Evan Niu
Evan Niu, CFA
Feb 12, 2020 at 11:00AM

Swedish music-streaming leader Spotify (NYSE:SPOT) made a splashy acquisition announcement alongside fourth-quarter earnings results last week: The company is purchasing The Ringer, a media outlet that primarily focuses on sports-oriented content but also includes other entertainment and pop culture topics. The deal is part of Spotify’s broader push into podcasts — The Ringer produces dozens of different podcast series that span those subjects.Spotify did not disclose terms of the deal, which is expected to close this quarter. Here’s how much the company is reportedly paying for The Ringer, which was founded in 2016 by sports commentator and personality Bill Simmons.

Daniel Ek on stage in front of the Spotify logo

CEO DANIEL EK. IMAGE SOURCE: SPOTIFY.

$600 million and counting

Bloomberg reports that the purchase price is 180 million euros, or nearly $200 million, up front. That will be followed by another $50 million payout at a later time. It’s not uncommon for acquisitions to incorporate later payoffs, which can be tied to the acquisition target’s subsequent performance or retention of key talent, among other possible conditions.

In this case, the deal requires Simmons to remain at Spotify for some unspecified period of time while providing protections for some of The Ringer’s employees. One of the big strategic questions around the deal was what value or utility Spotify could derive from The Ringer’s other forms of content like written articles or videos, since CEO Daniel Ek has outlined his vision for Spotify to become  “the world’s number one audio platform” (emphasis added).

Spotify had already spent around $400 million in 2019 to acquire three podcast companies: Gimlet Media, Anchor, and Parcast. With The Ringer’s price tag, that brings the cost of Spotify’s podcast shopping spree up to $600 million to $650 million.

Expect more podcast plays

Spotify views podcasts not only as an expansion into another content category for its platform, but also as a way to improve its cost structure. The core music-streaming business is weighed down by hefty royalties that eat into profitability, since per-stream royalties are a variable cost that scale with usage — artists and record labels that represent them are paid every time their music is played.

In contrast, producing exclusive podcasts entails relatively low fixed costs, and if that content can garner a broad audience, then those costs are spread across a large number of users, reducing average cost and bolstering capital efficiency. Spotify says that podcasts are driving increased engagement across both music and podcasts, while improving conversion rates of free listeners to paid subscribers.

In other words, the plan is already starting to work, so Spotify is going to continue investing heavily in the initiative. The company has cautioned that its data is still preliminary in nature, but the early indications are incredibly promising.

“Any decision to accelerate our investment in podcast and technology spend should be viewed as an indication of our belief that our strategy is having tangible results,” Spotify wrote in its fourth-quarter shareholder letter (after already announcing The Ringer deal). “We have gained even more confidence in the data, particularly around the benefits from podcasts, and as a result, 2020 will be an investment year.”

Evan Niu, CFA owns shares of Spotify Technology. The Motley Fool owns shares of and recommends Spotify Technology. The Motley Fool has a disclosure policy.

3 Great Stocks for Your IRA

Max out your IRA contributions, use those funds to buy and hold these three stocks for decades, and retire rich.

Andrew Tseng

Andrew Tseng

(FutureCashFlows)
Feb 12, 2020 at 8:45AM
Establishing an Individual Retirement Account (IRA) and contributing the annual maximum from a young age offers one of the surest ways to ensure a comfortable retirement.For example, a 22-year-old who contributes the maximum allowable $6,000 every year into a Roth IRA until age 60, and earns an average annual return of 9% (roughly the long-term stock market average) will have a tax-free nest egg worth about $1.7 million. That’s the power of tax-free compounding one can get from an IRA. And considering that the maximum allowable contribution occasionally increases, the future value of that nest egg has the potential to be even higher.

We know that establishing an IRA is important, but what should you invest in? Most financial advisors would first suggest you focus on picking a well-regarded index fund to get the investing diversification you need to ensure long-term performance. But if you are set on incorporating individual stocks into your IRA as well, there are three great stocks you might want to consider: Amazon.com (NASDAQ:AMZN)Netflix (NASDAQ:NFLX), and Spotify (NYSE:SPOT).

What makes them great? Each is a high-quality business that has decades of growth ahead, significant competitive advantages, founder-CEOs who own billions of dollars worth of company stock, and a stock price that reflects modest expectations relative to the company’s long-term potential. Let’s take a closer look at each.

An Amazon Prime Air plane flying in a clear blue sky.

IMAGE SOURCE: AMAZON.

1. Amazon: Active in several areas with enormous opportunity

Amazon is the perfect stock for an IRA. While it is one of the largest companies in the world, it still has a long runway. Its retail business, which includes everything except Amazon Web Services (AWS) and the “Other” net sales line, generated $231 billion of net sales last year. That’s only 0.9% of the estimated $25 trillion of global retail sales. Even considering an estimated $300 billion of gross merchandise volume (GMV), which the company does not disclose but includes everything sold through Amazon whether by Amazon itself or by third-party sellers, Amazon’s share of global retail sales appears less than 1.3%. That leaves a lot of addressable market still available to capture.

Then consider Amazon’s cloud business, Amazon Web Services, which had net sales of almost $10 billion last quarter or a $40 billion annual run rate. Andy Jassy, the CEO of AWS, thinks the segment is going after a $3.7 trillion global IT market, 97% of which is still on-premise, or not yet in the cloud. That represents enormous opportunity ahead.

Amazon also has a rapidly growing and high-margin ad business, which is the bulk of the $14 billion “Other” net sales line that grew 39% last year. But the best part is Amazon doesn’t just sit back and grow its existing businesses — it invents new ones out of thin air and has done so with remarkable success over its history. Count on one or more big new businesses emerging over the next decade or two to help the stock pad your IRA value.

2. Netflix: A solid plan to grow subscribers and profit from them

Too many investors look at Netflix’s historical stock chart and assume they missed the opportunity to buy it at a good price. Nothing could be further from the truth. Netflix has 167 million global subscribers, but there are projected to be at least 1.6 billion global internet-connected households a couple of decades from today. And most households have shown a willingness to pay for video entertainment. At the peak of pay-TV in 2012, before people began seriously cutting the cord in favor of streaming, 87% of U.S. households paid for television. And consider that the usual cable package costs households over $100 per month — several multiples more than Netflix’s $12.99 per month for its standard plan. There’s no reason the vast majority of those 1.6 billion or more global households wouldn’t subscribe to Netflix over the next several decades, considering it is rapidly investing in new content that appeals to audiences around the world.

Netflix is likely to be much more profitable in the future when it has several hundred million global subscribers. With each passing year it invests in new content, it is building up a permanent library for new subscribers to explore that is already paid for. That means its content costs on a per-subscriber basis will almost certainly fall over the long term, even if total content costs continue to rise. Couple that with gradually rising average revenue per user (through periodic price increases) and you have the recipe for huge long-term improvements in profitability.

A man with his eyes closed sitting in a chair listening to music through headphones.

IMAGE SOURCE: GETTY IMAGES.

3. Spotify: A superior product that’s becoming indispensable

Spotify is the world’s largest audio streaming business with 271 million monthly active users (MAUs), including 124 million premium subscribers and 152 million ad-supported MAUs. These figures grew by an impressive 31%, 29%, and 32%, respectively, in the company’s fourth quarter. Like Amazon and Netflix, Spotify has captured only a small fraction of its total long-term addressable market. There are over 3 billion global smartphones in Spotify’s territories or future territories that could represent future users. So Spotify has captured less than 9% of its global opportunity today. And smartphone adoption continues to grow around the world.

Spotify is underestimated by investors because people focus on its reliance on the major music labels, the fact that its music royalties are a variable cost that increases as revenue increases (as opposed to a fixed cost that stays flat as revenues increase), and the existence of competing music streaming platforms from the big tech companies.

But the tables are slowly turning: Spotify is becoming less reliant on the big-name music labels as it expands into non-music content like podcasting, while the music labels are becoming more reliant on Spotify since streaming is their only source of recorded music revenue that’s growing. That means Spotify’s negotiating position should only improve over time.

And while music royalties will remain a variable cost, the podcasting content it increasingly owns coupled with its game-changing podcasting ad technology is likely to create more Netflix-like fixed cost leverage that the company has lacked up to this point.

Finally, Spotify has a superior product as evidenced by the far greater number of users and paying subscribers, and it has much higher listener engagement. Management has said its user engagement is twice that of Apple Music’s listeners and three times that of Amazon Music’s listeners. Stock investors should consider Spotify for their IRAs, hang on for decades, and reap the rewards.

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