Spotify: Play the Audio

Disclosure: I am long shares of Spotify

Music is a world within itself

With a language we all understand

With an equal opportunity

For all to sing, dance and clap their hands

-Song “Sir Duke” by Stevie Wonder

I just wanted to start Spotify deep dive with a song that I have listened a lot in the last one month.

Peter Attia in a recent blog post quoted Mario Livio, author of “Why? What Makes us Curious”:

“The curiosity we feel when we see something that is surprising or puzzling or ambiguous, that doesn’t agree exactly with our previous knowledge or presumed knowledge, is not the same as the curiosity we feel as the love of knowledge — what drives research in science, for example. The first one is associated with a state of mind that is aversive. It’s an unpleasant feeling, which we try to get rid of.”

Well, I am not a scientist. But whenever I start a new deep dive, I strive to the best of my ability to start from the latter and avoid the former as much as possible. It did not take me too long to come up with a number of questions for Spotify. Why does Spotify only have ~25% gross margin? Why can’t Spotify just directly deal with artists? Why does an artist sign a deal with the labels? Why do the labels get to keep such high “take rates”? What happens if, for any reason, chaos ensues in the current supposedly cordial, symbiotic relationship between the labels and Spotify?

So, I dug deep and boy oh boy, last one month has been such an exhilarating learning experience. It certainly helped that I got to speak with an independent musician, a successful podcaster, a long-term shareholder of Spotify, and of course Sleepwell. I profusely thank them for their time and insights.

Here’s the outline for this month’s deep dive:

Section 1 A brief history of music in modern era: Given how much has changed in the music industry over the last three-four decades, it is important to understand how we got here. This section provides the context around music industry today.

Section 2 Understanding the music value chain: Thanks to Sleepwell, I have a good understanding of the music value chain. This will come handy when we get to the meaty stuff.

Section 3 Spotify’s drivers, growth opportunities, and height of ambition: I discussed Spotify’s key drivers, how Spotify is likely to eat radio’s lunch, and how under-monetized podcasts are today. Moreover, I elaborate how Spotify is building the destination for consumers for audio, operating system for audio for creators/artists, and “Facebook”-like ad platform in audio.

Section 4 Bulls vs Bears: Here I delved into the meaty stuff and dug into the three key concerns from the bears: a) the power of the labels, b) competition from big tech, and c) Spotify is no Netflix.

Section 5 Valuation and model assumptions: Model/implied expectations are discussed here.

Section 6 Management and culture: I briefly discussed Spotify’s management and their culture.

Section 7 Final Words: Concluding remarks on Spotify, and disclosure of my overall portfolio.