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Where Will Spotify Be in 10 Years?

By Andrew Tseng - May 10, 2020 at 10:50AM

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How big and profitable could the world's leading music streaming platform become?

Spotify (SPOT 1.25%), the world leader in subscription music streaming, is likely to be multiples of its current size in 10 years. Here's where the company could be by then.

Premium subs

The company's subscription streaming business is growing like crazy. At the end of March, Spotify had 130 million Premium subscribers globally, a figure that grew 31% year over year. Impressively, the company's momentum barely slowed from the 32% growth posted in the year-ago period despite the COVID-19 pandemic. 

As impressive as that is, what truly matters is how the business evolves over the long term. How big is the total addressable market for music and audio streaming?

Spotify's app being shown on several different devices.

Image source: Spotify.

There are over three billion smartphones in territories where Spotify operates or plans to soon do so, and those figures are growing over time. Other global platforms have user bases in the billions. For example, Facebook has 2.6 billion monthly active users, and YouTube has over two billion users. Music is universally appealing across cultures, and other means of music delivery -- physical CDs and downloads -- are in long-term decline. If someone wants to listen to virtually any album, any song, and on-demand, streaming is the only choice.

When one considers the streaming music landscape, Spotify is head and shoulders above its competitors. Those who are skeptical about Spotify say streaming music is a commodity, because each platform has access to the same catalog, and the product can be easily replicated. That's true in theory, but in practice, inventing and maintaining a service as popular as Spotify requires an intense focus on audio streaming that only Spotify has. Streaming music is an immaterial part of the overall business for most of the company's competitors.

That's why Spotify has been pulling away from No. 2 competitor Apple Music, which used to disclose subscriber numbers every few months but has been silent on the topic since June 2019. Instead, Apple now talks about achieving "all-time revenue records" in music, which is less impressive than it sounds. Almost any service that's growing should be achieving new revenue highs. 

Ad-supported 

Spotify's free, ad-supported service generated 678 million euros of revenue last year, which makes it just 10% of the top line. But it has enormous potential. For one thing, the company's rapidly growing podcasting business lies in this segment. Apple has been the podcast market share leader, but on Spotify's first-quarter earnings call, founder and CEO Daniel Ek said Spotify is now "the No. 1 audio service for podcasts in dozens of countries around the world and quickly gaining ground where we're not."

Spotify is bringing big innovation to podcast advertising. Historically, podcast advertisers didn't have much helpful data about the number of people who hear an ad, how many times they hear it, and whether it drove any new business. That has limited the value of podcasts to advertisers since they don't know what they are getting for their money. But Spotify has developed its Streaming Advertising Insertion (SAI) tool, which is designed to dynamically insert relevant advertising into podcasts -- rather than just play the same ad for every listener regardless of listener demographics.

Better targeted ads will not only improve advertisers' return on investment, but they will all be measurable for the first time. This has the potential to significantly increase the value of podcast ads, which will accrue meaningfully to Spotify as a large podcasting platform that increasingly owns its own original podcast content. Eventually, Spotify may make SAI available as a service to third-party podcast platforms, much in the same way Amazon made its internal cloud efforts, which became Amazon Web Services, available as a service to others.

A young woman dancing while listening to music through headphones.

Image source: Getty Images.

The other big opportunity is the company's two-sided marketplace. One of the first features is called Sponsored Recommendations, which allows labels and artists to promote new music to listeners Spotify knows will enjoy it. Ek has said this business has "software-type margins," which are extremely high. And the labels and artists should benefit. On the first-quarter call, he said "the direct ROI that we have on our Marketplace products is much better than other mediums that labels can market in." This could be a big and very profitable business for Spotify over time.

Over the long term, Spotify is likely to gain further share of listening in the car as unlimited data plans continue to get cheaper, and more cars have embedded modems. When Spotify and other streaming services are built into vehicle entertainment systems, these services are likely to take enormous amounts of market share away from terrestrial (AM/FM) radio.

10 years out

Today, Spotify's profit margins are low. Gross margin is hovering around 25% to 26%, but the company is still slightly unprofitable after overhead expenses.

In 10 years, Spotify's total user base could be more than triple its current size and still be a fraction of its total addressable opportunity. And profitability should improve due to high-margin podcast ads and marketplace revenue as well as the leveraging of its fixed costs. The company may even be able to negotiate more favorable music royalties since it will be that much bigger and more important to music labels as time goes on. That's why investors should buy and hang onto Spotify shares for the next decade.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Andrew Tseng owns shares of Amazon, Facebook, and Spotify Technology. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Facebook, 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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Spotify Stock Quote
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Meta Platforms, Inc.
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Alphabet Inc.
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Apple Inc.
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