"Hello 70 million subscribers," tweeted streaming-music company Spotify on Thursday. With 70 million users now subscribing to its paid service, Spotify has solidified its leadership position in the U.S. and Europe when measured by paying users, easily trumping Apple's (NASDAQ:AAPL) Apple Music and other competitors.
Spotify's strong growth in paid users bodes well for the company's upcoming initial public offering (IPO), which the company is hoping will take place in the first half of 2018, according to a report from Reuters earlier this week. In addition, Spotify's growth speaks to the overall health of the music business.
Here's a look at Spotify's and the music industry's strong growth, and what this means for investors in this space.
Growth is here
The music industry has been a questionable sector for decades. Ever since digital music went mainstream, record labels have faced challenges such as piracy, declining CD sales, and the rise of free streaming music. But as streaming music catches on, it's revitalizing music sales.
Momentum in streaming music is as strong as ever. Consider how Apple's music business returned to growth recently for the first time in years. "[H]aving the combination of the download business with the streaming service," explained Apple CFO Luca Maestri in an earnings call earlier this year, "which we didn't have until recently, we've been able to bring our music business back to growth, we've grown over the last three quarters, and we feel very good about that.
Since launching in 2015, Apple Music has garnered 30 million paid subscribers as of Apple's September update on the service's size.
The narrative of a healthy music industry is, perhaps, most evident in Spotify's startling growth. The streaming-music service's 70 million subscribers are up 10 million from the 60 million subscribers it had in July, and the count is up 20 million compared to the 50 million subscribers it had in March.
Of course, Spotify makes money from advertisements on its free tier, as well. Including its free tier, Spotify said in June it had an impressive 140 million active users. Given the sharp growth Spotify has seen recently in its paid subscribers, this figure has likely climbed, too.
Industrywide data on the music business also highlights promising trends. Music revenue in the U.S. saw growth accelerate in the first half of 2017, climbing 17% compared to the year-ago period, according to the Recording Industry Association of America (RIAA). The music business can thank growth in paid subscribers for streaming music, which were up 50% year over year during this period, for its recent momentum.
A good investment?
With such impressive growth behind it, there's good reason for investors to be interested in the music industry. And with a likely IPO for Spotify on the horizon, there will soon be even more reason for investors to consider investing in the fast-growing streaming-music space.
Spotify recently filed for an IPO on the New York Stock Exchange, according to Bloomberg, citing "a person familiar with the matter."
Of course, positive signs in the music business don't automatically translate to a good investment landscape. Despite upbeat signals in the music industry from growth in streaming subscribers and streaming revenue, streaming music pure-play Pandora (NYSE:P) hasn't lived up to expectations. The stock is down more than 60% in the past year, despite 29% and 9% year-over-year growth in total subscribers and revenue excluding ticketing, respectively, in Pandora's most recent quarter. The stock's decline comes as Pandora's on-demand music service has failed to live up to high expectations in a fiercely competitive market.
With Spotify planning an IPO and growing to 70 million subscribers, competition in streaming music will only intensify. But as a key market leader in streaming music, Spotify has the potential to be the streaming-music company that can rise above the noise.
Daniel Sparks owns shares of Apple. The Motley Fool owns shares of and recommends Apple and Pandora Media. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.