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Should Spotify Worry About the Challenge From Amazon Music?

By Prosper Junior Bakiny - Jan 29, 2020 at 7:20AM

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Amazon's streaming service is making headway, but here's why Spotify could survive the challenge.

Spotify (SPOT 4.71%) is currently one of the top companies in the music streaming industry, and despite its leading market share, it continues to make headway. During the third quarter, Spotify's monthly active users (MAUs) were 248 million, up 7% sequentially and 30% compared to the year-ago period. The company ended the quarter with 113 million Premium subscribers, a 31% year-over-year increase.

Furthermore, Spotify recorded total revenue of $1.7 billion, representing a 28% year-over-year growth, while its $54 million net income was significantly better than the $6 million net loss recorded during the prior-year quarter.

Overall, Spotify performed well last year, and its shares climbed by 31.8% during the year. This compares favorably to the S&P 500, which rose by 28.9% last year. Not all is well in Spotify-land, however. The company does have several competitors to contend with, and it looks as if Amazon (AMZN 3.58%) is increasingly becoming one of its top competitors. 

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Image source: Getty Images.

Amazon Music's growing customer base

Amazon recently announced that it had more than 55 million customers on its Amazon Music service. While that falls way short of Spotify's 248 million MAUs, Amazon Music seems to be growing fast and gaining traction across many different regions. In the company's own words: 

"This announcement comes after a year of incredible growth around the world: Amazon Music has grown nearly 50% year-over-year across the U.S., UK, Germany, and Japan and has more than doubled in our newer countries such as France, Italy, Spain, and Mexico."

Amazon's global ambitions are a secret to no one, and the company is now looking to increase its share in the market for music streaming services, but does this constitute a serious threat to Spotify?

Should Spotify be worried?

Amazon is the last company anyone wants to compete with. The tech giant boasts a strong community of users via services such as Amazon Prime and Prime Video, an imposing presence across several industries -- including the e-commerce, retail, and technology industries -- and the funds necessary to pursue a wide array of growth opportunities (Amazon had a cash balance of over $20 billion in the third quarter).

Despite all these factors, I believe Spotify can fend off the challenge from Amazon, or at the very least, the two tech companies can coexist; here's one reason why. Spotify understood the need to look for other avenues for growth, hence why the company decided to start investing heavily in podcast content. Spotify proclaimed that "we're entering the golden age of podcasts," and the company vowed to spend a small fortune -- about $400 million to $500 million -- on its podcast content strategy. 

Spotify's strategy has worked wonders so far. Here's what the company had to say about the success of its podcast content in its third-quarter letter to shareholders: "For music listeners who do engage in podcasts, we are seeing increased engagement and increased conversion from Ad-Supported to Premium. Some of the increases are extraordinary, almost too good to be true."

Spotify made even more headway since it announced its third-quarter financial results: The company recently became the biggest podcasting platform, kicking Apple (AAPL 2.45%) off the top spot in the process. 

The key takeaway for investors

Spotify's music streaming business is still performing well, and the company can also rely on its podcast content business moving forward. While it would be unwise to ignore the challenge from Amazon completely, Spotify will likely be A-OK. 

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