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Music Business and Solving the Rubik’s Cube
Unorganized and 'Thinking Out Loud' Thoughts on $SPOT
A Long Thread
Unorganized and 'Thinking Out Loud' Thoughts on $SPOT
A Long Thread
1/n…
After peaking in 1999, Music industry had its first earnings increase in 2016; since then the earnings have grown at a double digit CAGR.
Why?
Streaming! Today, Streaming represents >50% of industry’s revenue, and because of that even physical sales are rising.
...
After peaking in 1999, Music industry had its first earnings increase in 2016; since then the earnings have grown at a double digit CAGR.
Why?
Streaming! Today, Streaming represents >50% of industry’s revenue, and because of that even physical sales are rising.
...
2/n…
In 2019, the recorded music business was ~60% of what it was in 1999.
Does that help?
“An avg. CD buyer spent $45/Year on CDs. Today, with subscription at $10/Month, avg. Music Fan spends about $84/Year after discounts. And subs are growing globally.” ~Donald S. Passman
In 2019, the recorded music business was ~60% of what it was in 1999.
Does that help?
“An avg. CD buyer spent $45/Year on CDs. Today, with subscription at $10/Month, avg. Music Fan spends about $84/Year after discounts. And subs are growing globally.” ~Donald S. Passman
3/n…
“But an avg. buyer in 1999 stopped going to the store after a few years. Streaming is not only generating more $$$ but also bringing wider range of consumers.”
~Donald S. Passman
“But an avg. buyer in 1999 stopped going to the store after a few years. Streaming is not only generating more $$$ but also bringing wider range of consumers.”
~Donald S. Passman
4/n…
Concerns Regarding $SPOT -
Concern #1: SPOT doesn’t have leverage over labels
“$SPOT has paid $16Bn to the Music industry since its launch. Music industry is growing because of streaming." ~ @eldsjal
Context: $WMG’s current MarketCap is $16Bn.
Concerns Regarding $SPOT -
Concern #1: SPOT doesn’t have leverage over labels
“$SPOT has paid $16Bn to the Music industry since its launch. Music industry is growing because of streaming." ~ @eldsjal
Context: $WMG’s current MarketCap is $16Bn.
5/n…
“The best distributors/aggregators/market-makers win by providing the best experience, which earns them the most consumers/users, which attracts the most suppliers, which enhances the user experience in a virtuous cycle.” ~ @benthompson
“The best distributors/aggregators/market-makers win by providing the best experience, which earns them the most consumers/users, which attracts the most suppliers, which enhances the user experience in a virtuous cycle.” ~ @benthompson
6/n…
Since Music is a commodity that is not exclusive to $SPOT, a better UX that exponentially gets better, gradually wins. SPOT keeps attracting more users, and that will keep the existing labels (a.k.a music suppliers).
Music is a commodity; Music Streaming is not!
Since Music is a commodity that is not exclusive to $SPOT, a better UX that exponentially gets better, gradually wins. SPOT keeps attracting more users, and that will keep the existing labels (a.k.a music suppliers).
Music is a commodity; Music Streaming is not!
7/n…
“You have to be 10 times better than second best.”
~Peter Thiel
"We're 2x the size of our nearest competitor, and 3x the engagement of our nearest competitor." ~ @eldsjal
Basic Math = $SPOT gets 6x more data than the second largest, $AAPL.
“You have to be 10 times better than second best.”
~Peter Thiel
"We're 2x the size of our nearest competitor, and 3x the engagement of our nearest competitor." ~ @eldsjal
Basic Math = $SPOT gets 6x more data than the second largest, $AAPL.
8/n…
In 2019, SPOT tried to go direct with artists, & pulled back bec SPOT still needs music from labels. Once the flywheel is spinning at full speed, SPOT will flex. As best of the artists leave labels & buyback their master records, they will go direct with SPOT...
In 2019, SPOT tried to go direct with artists, & pulled back bec SPOT still needs music from labels. Once the flywheel is spinning at full speed, SPOT will flex. As best of the artists leave labels & buyback their master records, they will go direct with SPOT...
9/n…
Concern#2: Podcasts are not monetized
“Podcasts will be as important to SPOT as Originals are to $NFLX.”
~Barry McCarthy, CFO, SPOT, Jul 2015 - Jan 2020.
Concern#2: Podcasts are not monetized
“Podcasts will be as important to SPOT as Originals are to $NFLX.”
~Barry McCarthy, CFO, SPOT, Jul 2015 - Jan 2020.
10/n…
$AAPL doesn’t care, and creators are increasingly choosing $SPOT because SPOT is currently the best at monetizing them through ads.
Exclusive Podcasts also offer a strong IP.
$AAPL doesn’t care, and creators are increasingly choosing $SPOT because SPOT is currently the best at monetizing them through ads.
Exclusive Podcasts also offer a strong IP.
11/n…
It is to be seen whether Joe Rogan brings in more audience for $SPOT, but if you know @joerogan, you know the engagement will skyrocket. SPOT has also signed @KimKardashian for an exclusive podcast. These moves seem strategically very thoughtful.
...
It is to be seen whether Joe Rogan brings in more audience for $SPOT, but if you know @joerogan, you know the engagement will skyrocket. SPOT has also signed @KimKardashian for an exclusive podcast. These moves seem strategically very thoughtful.
...
12/n…
Concern#3: Gross Margins and FCF
Because music supply is concentrated among 4 players including $WMG, $SNE, $VIVHY ’s UMG, and Merlin, $SPOT won’t come out to say “we’re going to eat labels’ lunch”, but it has renegotiated royalties, and the GMs have expanded
…
Concern#3: Gross Margins and FCF
Because music supply is concentrated among 4 players including $WMG, $SNE, $VIVHY ’s UMG, and Merlin, $SPOT won’t come out to say “we’re going to eat labels’ lunch”, but it has renegotiated royalties, and the GMs have expanded
…
13/n…
from 20% to 25% in 2019. @eldsjal thinks the business will do 30-35% long term. Under-Promising! Additionally, $SPOT is one of the very few “newly listed” businesses that have been FCF positive for a while now.
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from 20% to 25% in 2019. @eldsjal thinks the business will do 30-35% long term. Under-Promising! Additionally, $SPOT is one of the very few “newly listed” businesses that have been FCF positive for a while now.
...
14/n…
As $SPOT grows for the next several years, it expects % of royalties to go down, because streaming is also leading to increase in the sales of concert tickets and physical goods - Vinyl and CD, opening up further opportunities for revenue growth. https://www.theverge.com/2019/9/6/20852568/streaming-revenue-growth-spotify-apple-music-industry-ariana-grande-drake-taylor-swift
As $SPOT grows for the next several years, it expects % of royalties to go down, because streaming is also leading to increase in the sales of concert tickets and physical goods - Vinyl and CD, opening up further opportunities for revenue growth. https://www.theverge.com/2019/9/6/20852568/streaming-revenue-growth-spotify-apple-music-industry-ariana-grande-drake-taylor-swift
15/n…
But even if the % of music royalties stay the same, the costs for podcasts are fixed, creating “NFLX-like, FCF-Drain” illusion. For SPOT, Podcasts may subsidize music, if they could. $SPOT is also adding video to its platform to create personal experiences.
...
But even if the % of music royalties stay the same, the costs for podcasts are fixed, creating “NFLX-like, FCF-Drain” illusion. For SPOT, Podcasts may subsidize music, if they could. $SPOT is also adding video to its platform to create personal experiences.
...
16/n…
Eventually, we may see SPOT integrating offline world with online, creating a “superapp-like” experience for music, shows, audio learning, podcasts, etc. I also see podcasts happening live offline in front of larger audiences. Speculative, but possible!
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Eventually, we may see SPOT integrating offline world with online, creating a “superapp-like” experience for music, shows, audio learning, podcasts, etc. I also see podcasts happening live offline in front of larger audiences. Speculative, but possible!
...
17/n…
Concern #4: TAM is not Massive
"Audio - not just music - would be the future of Spotify.” @eldsjal
The management thinks that the TAM is 3Bn Users, but as an investor, I'd be happy if $SPOT reaches half of that number.
Write-up by @brettbivens https://venturedesktop.substack.com/p/spotify-the-ambient-media-company
Concern #4: TAM is not Massive
"Audio - not just music - would be the future of Spotify.” @eldsjal
The management thinks that the TAM is 3Bn Users, but as an investor, I'd be happy if $SPOT reaches half of that number.
Write-up by @brettbivens https://venturedesktop.substack.com/p/spotify-the-ambient-media-company
18/n...
$SPOT is attacking the entire audio market that's exploding. Growth of cos. like Knowable and Audible strengthens that thesis. Inevitably, SPOT will take share from radio.
...
$SPOT is attacking the entire audio market that's exploding. Growth of cos. like Knowable and Audible strengthens that thesis. Inevitably, SPOT will take share from radio.
...
19/n...
Concern #5: $SPOT is not Sticky
Concept of 'Tipping the Market': “It’s a tendency of one system to pull away from its rivals in popularity once it has gained an initial edge and emerge as de facto industry standard.”
https://marketing.wharton.upenn.edu/wp-content/uploads/2016/10/tipping_indirect_network_effects_09_97.pdf
Concern #5: $SPOT is not Sticky
Concept of 'Tipping the Market': “It’s a tendency of one system to pull away from its rivals in popularity once it has gained an initial edge and emerge as de facto industry standard.”
https://marketing.wharton.upenn.edu/wp-content/uploads/2016/10/tipping_indirect_network_effects_09_97.pdf
20/n...
Adaptive systems are great at tipping. They use data the best to build intuitively interactive platforms that become incrementally more powerful with engagement. Extremely hard for Alexa to replace Google Search until it is used as much or until it processes as much data.
Adaptive systems are great at tipping. They use data the best to build intuitively interactive platforms that become incrementally more powerful with engagement. Extremely hard for Alexa to replace Google Search until it is used as much or until it processes as much data.
21/n…
$SPOT is tipping the market. As SPOT learns more about a user every time one listens a music track or an episode of podcast on the platform, its recommendations become much better, helping the user create multiple playlists, increasing the stickiness.
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$SPOT is tipping the market. As SPOT learns more about a user every time one listens a music track or an episode of podcast on the platform, its recommendations become much better, helping the user create multiple playlists, increasing the stickiness.
...
22/n...
Also, SPOT answers both of these checklist questions that @sarahtavel likes to ask of a product, in affirmative: https://twitter.com/iramneek/status/1274770178480279553?s=20
Also, SPOT answers both of these checklist questions that @sarahtavel likes to ask of a product, in affirmative: https://twitter.com/iramneek/status/1274770178480279553?s=20
23/n...
Finally - Management and Focus
“A Nordic capacity for hard work is combined with geographical openness. Scandinavia’s small population has forced companies to look abroad for their living.
~Edward Chancellor, Capital Returns
H&M, Ikea, Maersk, Nokia, Volvo, etc.
Finally - Management and Focus
“A Nordic capacity for hard work is combined with geographical openness. Scandinavia’s small population has forced companies to look abroad for their living.
~Edward Chancellor, Capital Returns
H&M, Ikea, Maersk, Nokia, Volvo, etc.
