There aren't many digital platforms that have the potential to serve the majority of the world's population. But Spotify Technology (SPOT -1.30%) is one of them. Here's where the audio-streaming company could be in 10 years.
A global growth opportunity
Spotify is the largest subscription audio platform in the world with 138 million paying premium subscribers as of June 30. That figure was up 27% versus the prior-year period. In total, between premium subscribers and the free ad-supported service, the company ended June with 299 million monthly active users, 29% higher versus the prior year.
These numbers sound huge, and they are, but consider that the global population is 7.8 billion people. And the global population excluding China, where Spotify competes through its roughly 8% stake in China's Tencent Music (TME 3.52%), is still 6.4 billion. That represents a lot of opportunity over the next decade or two.
Image source: Getty Images.
While Spotify's service isn't available yet in every country, there is no obvious reason that it shouldn't be in most of them over the long term. Music is universally enjoyed across cultures and geographies. And streaming, with all the personalization and new content discovery that Spotify is known for, is a much better user experience than linear radio.
Spotify has competition from Apple's Apple Music, Amazon's Amazon Music, Sirius XM and Pandora in the U.S., and certain platforms are successful in their local markets. For example, Gaana and JioSaavan lead the market in India, which Spotify entered last year.
But given Spotify's dominance globally and its rapid growth trajectory, it's clearly running circles around its big-tech competition. Apple even stopped releasing the number of Apple Music subscribers in mid-2019, almost certainly because it would compare poorly to Spotify's numbers.
Profits will surge
Spotify is considered a fairly low-profit-margin business today because its music streaming business needs to pay out the majority of its revenue directly to the music labels and other music rights holders. But the company has some big levers to pull to boost profits over time, including podcast advertising and allowing labels and artists to essentially advertise on its huge platform (called the "two-sided marketplace" initiative).
Podcast ads have never been well targeted or effective, especially when compared with the online ads we're used to on Alphabet's Google, Facebook, Facebook's Instagram, and others. Traditionally, every podcast listener hears the same host-read ads regardless of the particular demographics of the listener. And the advertisers have never had a great way to measure the reach or effectiveness of podcast ads.
But Spotify is trying to change the podcast ad game in a huge way. Its Streaming Ad Insertion (SAI) tool dynamically inserts ads into podcasts depending on individual listener demographics. Spotify might not know quite as much about users as Google or Facebook does, but it knows enough to target ads to podcast listeners much better than no targeting at all. It's also showing podcast ads on phone screens, which listeners can see and click on. This should be much more effective in targeting, conversion, and effectiveness, which means advertisers should be willing to pay more for these podcast ads on Spotify than they ever have before.
As Spotify increasingly pumps out more of its own and licensed podcast content, and continues to grow its overall user base, it should reap the rewards due to more and higher-priced SAI podcast ads.
Increasing returns to scale
If Spotify continues to dominate audio streaming globally, and streaming continues to take share from radio, Spotify's going to have hundreds of millions more users and premium subscribers than it does today.
The first-order effects of that are going to be more revenue and profit. But we also need to consider how much more important Spotify would be to the music rights holders in the future. Streaming is already the savior of the music labels as the only major source of recorded music revenue that's growing, and Spotify is the single largest contributor to that by far.
But imagine when Spotify is three, four, or five times larger than it is today and the music rights holders are even more dependent on it. Spotify may be in a better position to negotiate for relief on those high music royalties at that point.
That's just one more reason investors should expect Spotify to be much bigger and more profitable in 10 years.
