Spotify is the biggest music-streaming service in the world, with 159 million monthly active users streaming an average of 25 hours per month. Users and engagement are growing at a torrid pace as well, up 29% and 48%, respectively, year over year. But as big-name competitors like Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) enter the market, and Pandora (NYSE:P) starts to make gains with its premium subscription service, Spotify needs to show a competitive advantage in order to keep growing.
Apple is already reportedly on pace to surpass Spotify's U.S. subscribers this summer despite a late start. Pandora is showing strong engagement among its premium subscribers, albeit with modest growth in subscriber count.
There's not much in the way of exclusive content for music streaming. Pretty much every on-demand service offers the same 35 million songs. But in its F-1 filing, Spotify offered several factors that distinguish it from the competition.
More listening means more data
As mentioned above, Spotify has 159 million monthly active users around the world, and they streamed 11.5 billion hours of content in the fourth quarter. That kind of scale presents a unique advantage for the company. For reference, Pandora streamed just 5 billion hours of content last quarter, and that number is steadily declining.
The data Spotify collects from its users helps improve the user experience by improving search functionality and content discovery. But that's not much different from other platforms with significant user bases.
Spotify also uses its data to personalize the user experience. Algorithms relying on Spotify's aggregated user data and your personal data can help surface the right content at the right time based on time of day and user context. That level of personalization is much tougher to copy, and Spotify's scale gives it a distinct advantage in that realm.
There are three types of playlists in Spotify and they're all very important to distinguishing the music streaming service from its competition.
Algorithmically generated personalized playlists account for 17% of listening hours. These playlists leverage Spotify's data to surface content for each individual user and include playlists like Discover Weekly and Release Radar.
Spotify also curates content itself with playlists like RapCaviar and Fresh Finds. These playlists account for 15% of total listening, and present a unique monetization opportunity for sponsored placement for songs and artists. Combined with algorithmic playlists, Spotify is programming nearly one-third of all listening on the service.
Spotify's user-generated playlists may be its biggest competitive advantage. Playlists created and shared by users accounted for 36% of listening hours. Much of this is likely personal playlists created by the user of favorite tracks, but a lot also comes from popular third parties that share playlists publicly.
In total, playlists account for over two-thirds of all listening on Spotify. The company's scale gives a distinct advantage in creating playlists algorithmically as well as being a distribution platform for third-party playlists.
Apple's entire pitch around Apple Music when it launched is that people want expertly curated playlists. Spotify is showing that's not exactly the case. While there's demand for that, users are just as happy listening to algorithmically organized music and even happier to listen to their own playlists or another user's. To that end, Spotify strikes a perfect mix of Apple Music and Pandora.
Spotify is reportedly looking into building its own smart speaker. Amazon has had tremendous success with its own smart speaker, the Echo, and Apple just entered the market with the HomePod.
Amazon encourages users to subscribe to its music-streaming service on Echo by offering a steep discount to users who only want to listen on their Echo devices, locking them into the ecosystem. Amazon may convert those users into a full subscriber later, but Echo users are worth enough to its retail business that the company can take a loss on premium music subscriptions. Apple may follow suit with a HomePod-only streaming service.
But one big advantage of Spotify, for the time being, is that it's completely platform agnostic. With no allegiances to hardware partners, the streaming experience isn't objectively better or worse on any single piece of listening hardware. Older streaming platforms, like Pandora, are also platform agnostic, but a lot of the new entrants in music streaming aren't. That's certainly an advantage.
Is it enough to keep growing?
Spotify sees plenty of room to keep growing. It points to the 3.6 billion people that use the internet around the world as its market opportunity. It also notes the average American listens to 32 hours of music per week, which is significantly more than the 25 hours of listening per month its users average.
With its competitive advantages in collecting user data to offer an unparalleled user experience and personalized playlists, Spotify should be able to continue attracting millions of new listeners and subscribers for many years to come. This will lead to a virtuous cycle, since its biggest advantages stem from its scale.
Editor's note: This article has been corrected to say that Pandora streamed 5 billion hours of content last quarter. Also, this article has been corrected to say that Spotify has 159 million monthly active users streaming an average of 25 hours per month.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon and Apple. The Motley Fool owns shares of and recommends Amazon, 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.