Spotify (NYSE:SPOT) was founded in 2006 on the idea of building a service with a better value proposition than pirated music, which was killing the music industry at the time. Fast forward to 2020, and the Swedish technology giant has 345 million users and 155 million paying subscribers across 178 markets. It still offers unlimited music streaming through ad-supported and monthly subscription products, but has recently launched headfirst into the podcast and spoken-word market as well.
Here's why Spotify is set to dominate the global audio market, and why it should win versus its music, podcast, and legacy radio competitors.
Image source: Getty Images.
Secular tailwind
Music streaming has been around for over a decade, but industry growth, especially in non-Western markets, is just getting started. Spotify is entering more than 80 new markets in 2021, opening up the service to more than a billion potential new users in countries like Nigeria, Bangladesh, and Pakistan. Even in the U.S., one of its most mature markets, hundreds of millions of dollars are still spent each year on CDs and digitally owned music through platforms like iTunes. Over time, the majority of this spend should migrate to streaming services like Spotify, simply because these platforms offer a better value proposition for consumers.
It is estimated that at the end of 2019, only 30% of the U.S. population subscribed to a music streaming service. For reference, in Sweden, Spotify's home country, 52% of the population pays for music streaming. In Africa and Southeast Asia, where music streaming penetration is far lower than in Western markets, there is even more room for services like Spotify to grow.
On the ad-supported side of things, Spotify operates with its free tier. Each year, over $10 billion is spent in the U.S. alone on traditional radio advertising. As with streaming TV, over time the majority of these advertising dollars will transition to on-demand platforms or disappear altogether as consumers opt for ad-free streaming subscriptions. Whatever happens, it will benefit Spotify.
How it can win vs. other music streamers
Spotify faces tough competition. Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), and Amazon (NASDAQ:AMZN), three tech giants with gigantic balance sheets, all have music streaming services that compete for users. Pandora, which is now owned by Sirius XM (NASDAQ:SIRI), is another competitor but with significantly fewer users. Spotify has won against the tech giants because the audio market is its No. 1 priority. This focus allows it to work intensely to improve the experience for artists, industry executives, and consumers. It's proven out in Spotify's user growth, which has stayed steady in between 25% and 32% for the last 10 quarters even with these companies vying for subscribers.
How it can win the podcast market
While Spotify has a solid lead in music streaming, it is working from behind in podcasts. Apple has supported podcasts since 2005 through iTunes and its pre-downloaded Apple Podcasts app, and has been the industry leader for the last decade. Spotify only added podcasts to its service in 2015, however. By leveraging its already large music listener base and recent exclusive deals with shows like The Joe Rogan Experience, the company is actually projected to pass Apple in market share by the end of this year.
Spotify is also building a podcast advertising network as another way to separate itself from Apple and its smaller competitors. With its original and exclusive shows, plus Anchor and Megaphone (the two podcast creation platforms it owns), Spotify has tens of thousands of shows it can immediately start serving targeted advertisements on. With a global listener base, data it can use to target advertisements, and two popular production tools, Spotify is building a value proposition for both creators and advertisers that is unmatched in the podcast industry.
There are a lot of moving parts to Spotify's business. It operates in dynamic industries with large competitors like Google and Apple. However, with its underlying business model, high switching costs, and the investments it is making in podcasts, Spotify is setting itself up to eventually dominate the audio market. I can't speak to where the stock will trade, but if you believe in Spotify's business model and the growth of on-demand audio, there is a high likelihood this business is much larger five years from now.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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