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Spotify Has a Big Opportunity Right Now

By Adam Levy – May 1, 2020 at 11:50AM

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COVID-19 is forcing consumers to change their behavior, and Spotify could be a winner.

The impact of COVID-19 on Spotify (SPOT 0.40%) has been relatively muted. The music-streaming leader did see a decrease in listening hours, as consumers spent less time commuting to work and going to the gym -- prime listening hours -- but active accounts weren't really impacted.

"[W]hen we saw consumption starting to decline we would have assumed that MAUs and Paid Subscribers would be negatively impacted, but that wasn't the case," CEO Daniel Ek wrote in the company's April 29 letter to shareholders. "In fact, both new and reactivated MAUs grew substantially even during lockdown periods in major markets."

On the earnings call, Ek provided some insight into why active accounts remained relatively unaffected by the impact of the COVID-19 pandemic, and he was generally optimistic about the business going forward.

Interior of Spotify offices.

Image source: Spotify.

Spotify's big opportunity

Ek pointed out that Spotify's biggest competitor isn't another streaming service, or even another form of music purchasing like digital downloads or vinyl records. It's radio.

"The 20-year trend is that everything linear dies, and on-demand wins. This is a trend that we suspect will be accelerated by the COVID pandemic," Ek said on Spotify's first-quarter earnings call.

The most popular place to listen to the radio is in the car. With people staying at home, the radio has become surprisingly less accessible. Who has a radio in their home anymore? As a result, people are discovering streaming and podcasts, and ways to listen to them at home. Management pointed out streaming on game consoles increased over 50%.

Spotify sees the opportunity to attract more subscribers now and expects new behaviors -- listening while cooking and cleaning in the home -- to be additive to pre-COVID behaviors like listening in the car and gym when things return to normal.

Spotify's advantage

Even if Spotify sees its opportunity as winning over radio listeners, it still has a lot of competition for those listeners now that they're stuck at home. Amazon (AMZN -0.64%) notably has a strong position in the smart speaker market, and the retail company has made a significant push into premium music streaming over the last couple years. Those factors led one analyst to cast doubt on Spotify's ability to compete amid the current environment.

Indeed, Amazon may be Spotify's biggest competitor, but Ek points out Spotify's biggest advantage: its free tier. "The majority of our competitors do not have a free tier," Ek noted. "And that, of course, makes Spotify a more appealing option in this environment."

Amazon includes limited free streaming for Prime members and even more limited streaming options for nonmembers. Spotify's free tier includes complete access to on-demand listening from a computer, and slightly more limited options on mobile and other devices.

Spotify has historically done well converting free listeners into paid subscribers. The majority of its subscribers start as free listeners. As such, winning over a lot of free listeners right now should translate into a surge in paid subscribers later when the economy starts to recover.

Spotify is well-positioned to weather the coronavirus storm and capitalize on the massive shift in consumer behavior. That showed up in its surprising first-quarter results, and investors should expect Q2 results to show a strong follow-up. Management expects to add another 3 million to 8 million paid subscribers. (It added 8 million in Q2 last year.) Revenue growth will be slightly muted as a result of foreign exchange headwinds, but management still sees 11% year-over-year growth at the midpoint.

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. The Motley Fool owns shares of and recommends Amazon and Spotify Technology and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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