Music listeners are paying more to stream their favorite hits today than they were just a year ago. Unless they listen on Spotify (SPOT 0.20%), that is.
YouTube Music is the latest streaming service to raise prices, asking customers to pay $1 more per month. The new $10.99 per month price tag from the Alphabet (GOOG 9.96%) (GOOGL 10.22%) company matches the pricing levels of Apple (AAPL -0.35%) and Amazon (AMZN 3.43%) after their music services performed price hikes in October and January, respectively.
Meanwhile, Spotify continues to charge U.S. listeners just $9.99 per month for an individual plan. Should investors expect the streaming music leader to follow suit?
A long-awaited price hike
Investors have been expecting a U.S. price hike from Spotify since it reported its third-quarter earnings last year. They may be waiting a bit longer still.
CEO Daniel Ek said increasing prices in the U.S. is something he'd like to do during the third-quarter earnings call last fall. Before they could push through a price hike, though, they'd need new deals with the record labels, either label-by-label or with the Recording Industry Association of America (RIAA) as a whole.
No such deal has materialized so far. Or, if it has, management is holding back on the price hike. And it has a good reason to wait.
Spotify's adding tens of millions of new users
Spotify is adding more users than it ever has before.
Its total monthly active users grew by 33 million in the fourth quarter and another 26 million in the first quarter (both new records at the time). Paid subscribers are up 15 million over the last six months, surpassing expectations. For the last five quarters, Spotify has seen accelerating user growth.
And North America has played a substantial role in that growth. The region accounted for 39% of premium subscribers in the first quarter of 2022, and it accounted for the same percentage at the end of the first quarter of 2023.
That is to say, the U.S. is still adding a lot of new paid users. That's something Ek noted the company could benefit from as competitors raised prices. Spotify already has industry-leading subscriber churn rates. If the competition is charging more, it's even less likely a subscriber will cancel and go to another service. Spotify's low subsciption price looks like a significant business advantage.
A price hike will come
It's unlikely Spotify will be able to justify keeping its price at $9.99 per month indefinitely. Pressure from both labels and investors will ultimately lead to an increase for U.S. subscribers.
When Spotify does raise prices -- after seeing the beginnings of slowing subscriber growth in the U.S., perhaps -- it should provide a meaningful boost to its gross margin. While the streamer will likely have to pay about two-thirds of revenue to the labels and songwriters, it won't incur any additional operating expenses. As such, a price hike will push the music-streaming business closer to management's long-term goal of a 30% gross margin.
But the longer Spotify waits to raise prices, the more market share it can grab from the big tech companies it's competing against. It's seemingly already seeing benefits in the two quarters it's reported since Apple first made its Apple Music price hike. Investors should look for that trend to continue when Spotify reports its second-quarter numbers.
Despite Spotify stock's run-up in price this year, its EV/Sales ratio of about 2.5 is still around the lows it saw in 2019. And with the strong potential for revenue acceleration and margin expansion on the horizon, it looks like there's still an opportunity to add Spotify to your portfolio.
