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3 Music-Streaming Industry Takeaways From Warner Music Group's IPO Filing

By Adam Levy – Jun 2, 2020 at 11:00AM

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Warner Music Group is very bullish on streaming.

Warner Music Group (WMG) is ready to make its public debut after putting it on hold as coronavirus rocked the stock market. Just like any music label, it's now heavily invested in music streaming and its partners like Spotify (SPOT -3.41%) and Apple (AAPL 0.20%). Over half of the industry's revenue now comes from streaming. As such, WMG shared a lot of details about its outlook for the music-streaming industry.

Unsurprisingly, the music label is optimistic about the industry's prospects. (It's trying to sell shares of its company, after all.) "We believe consumer adoption of paid streaming services still has significant potential for growth," WMG wrote in its S-1 filing with the SEC.

Here are three big reasons WMG sees streaming revenue continuing to climb.

A woman wearing headphones looking at a smartphone.

Image source: Getty Images.

Paid streaming is still in the early adoption phase

In Sweden, where Daniel Ek founded Spotify, 30% of the population subscribes to a paid streaming service. By comparison, just 25% of Americans, 16% of Germans, and 7% of Japanese subscribe to a paid streaming service.

While there are certainly differences between markets, the U.S., Germany, and Japan are all seen as equally developed, and they should have similar abilities to pay. That suggests penetration rates ought to continue climbing.

The discrepancy in paid subscriber penetration in some markets is evidenced in Spotify's quarterly reports. North America and Europe account for 61% of Spotify's total monthly active listeners, but 68% of paid subscribers during the first quarter. That's not a coincidence; Spotify entered Latin America and Asia later than Europe and North America, so penetration rates are still playing catch-up.

Smart speaker adoption drives paid subscriptions

Smart speakers are still growing in adoption. WMG cites estimates from PwC that smart speaker adoption will grow at a 38% compound rate from 2018 to 2023, reaching 440 million devices. And it thinks smart speakers are an important tool to convert casual listeners into paid subscribers. "According to Nielsen, 61% of U.S. consumers who use a smart speaker weekly to listen to music currently pay for a subscription as well," it wrote in the S-1.

That's why Spotify regularly runs promotions offering free smart speakers to subscribers -- it drives listeners to sign up and stay subscribed. Apple had to start supporting rival smart speakers in order to continue growing Apple Music. Its HomePod remains a small player in the space, due in part to its high price. 

Music listening is the most popular activity on smart speakers, rivaled only by inquiries like "what's the weather?" As smart speaker penetration increases, it should benefit the entire industry.

Room to increase average price

The last potential area of growth for music streaming is in increasing pricing. "We believe the value proposition that streaming provides to consumers supports premium product initiatives," the company wrote.

Some music services offer higher-quality audio streams at a premium price. Spotify has resisted the idea saying high-definition audio isn't a big differentiator. But a premium audio service may work well for Apple when bundled with its premium smart speaker.

In the meantime, Spotify has seen its average price fall over the last couple years. It says the biggest impact on its price decline is a mix shift in geographies. A subscription in a growth market like India, for example, is less expensive than in an established market like Sweden. In more established markets, the company's been experimenting with price increases.

A price increase would be the most direct path to improving profitability at Spotify. Unlike Apple, Spotify needs to make a profit on streaming. While it would still have to provide a fixed percentage of its revenue to music labels like WMG, it could better leverage fixed operating expenses to produce a profit.

Investors (and music subscribers) should expect a move to increase streaming prices at some point in the future, even if just to keep up with inflation. Spotify's had the same $9.99-per-month plan available since it launched in the U.S. in 2011. Combined with the factors driving subscriber counts higher, there's a lot of room left to grow in the industry.

Adam Levy owns shares of Apple. The Motley Fool owns shares of and recommends Apple and Spotify Technology. The Motley Fool has a disclosure policy.

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