Streaming-music leader Spotify (NYSE:SPOT) is still in that confusing period in an internet company's life cycle where the upbeat news about rapidly rising revenue gets tempered by the corresponding word of increasing losses on the bottom line.
In this segment from MarketFoolery, host Chris Hill and analyst Abi Malin talk about what it will take to turn this company profitable, how long it might be before that happens, its competitive strategy, the investment thesis, and more.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
This video was recorded on April 29, 2019.
Chris Hill: Spotify has hit 100 million paying subscribers. That's probably the highlight of their first-quarter report. I mean, their revenue is growing, but their losses are also growing.
Abi Malin: Yeah. I mean, that number is up 32% year over year, which is huge. It's also about two times as large as the latest figures given for Apple Music. So, again, huge. Total monthly users, that includes people who don't pay but have ad-supported service, reached 217 million. That's pretty astonishing when you think about the growth and the competitive landscape of this industry as well.
Hill: When are they going to be profitable? It's not like they lost a ton of money. But they have 100 million paying subscribers. Is there a pathway to profitability that is short? I haven't talked to anyone who uses Spotify who isn't happy with it. But I'm wondering, at what point do they turn on the money machine?
Malin: I think it's about conversion, going from an ad-supported free user to a discounted trial period to then paying full price. That really brings out the customer lifetime value. They're still in a land-grab mode, those prices maybe aren't reflective of the most profitable or the most revenue-generating that Spotify could be when they have that dominance. But they're still in a land-grab space, so they're not necessarily trying to pump the volume. But I do think that conversion rate and how quickly you can turn customers from free to paying full price, will really be impactful for that tipping point.
Hill: As an analyst, is this an industry that interests you at all, when you consider Pandora, Apple Music? Obviously, it's a small part of Apple. But is this something that you look at and think, "Oh, yeah, shareholders can make money in this industry"?
Malin: I do. I think it's something to watch for economics, not just for this industry, but the whole integration from the artists, the concerts, the music, streaming, the ticket sales, everything. There's a balance of power, and maybe who holds that pricing power is shifting. So I think it's definitely interesting, something to watch. One hundred million is kind of an arbitrary number, the same way we think of the fiscal year ending in December is sort of an arbitrary time. It's not necessarily indicative of a change in thesis for me, I would say. But I do think it's interesting to watch, the pace at which it's happened.
Hill: Yeah, I guess I'm just surprised that they're still not profitable when they have that many. It's one thing to be like, "We're building our paying subscriber base. Yes, we still have the ad-supported." I mean, that's been the story with Spotify for a while. I just look at that and go, that's a big number. That's an awful lot of people who are paying you every month.
Malin: Where's the cash going?
Hill: Right. What's going on with your business, that you're not able to make money?
Malin: Yeah. Again, I think 100 million suggests maybe dominance in that space. But when you look at the music consumption value chain, I don't necessarily think that the most valuable part of that music...I would not make the argument that long-term, it'll be with Spotify.