Chit Chat Stocks - The Future of Spotify (Ticker: SPOT) with Jeremy Deal

Episode Date: December 21, 2023

Spotify Technology (SPOT) is a leading music streaming platform that has transformed the way people consume music globally but faces challenges from competition in the crowded streaming market and the ongoing evolution of the music industry's business models. Listen as Brett and Ryan ask questions about the company, its business model, and its valuation. Enjoy the show! ***************************** Chit Chat Money is presented by Interactive Brokers. Switch to the best brokerage in investing today: ⁠⁠⁠⁠⁠⁠ibkr.com/info⁠⁠⁠⁠⁠⁠ ****************************** Want updates on future shows and projects? Follow us on Twitter: ⁠⁠⁠⁠https://twitter.com/chitchatmoney ⁠⁠⁠⁠ Subscribe to our Substack to receive free show notes and charts for our Tuesday episodes: ⁠⁠⁠⁠https://chitchatmoney.substack.com/⁠⁠⁠⁠ Interested in more from Jeremy Deal? ⁠⁠⁠⁠⁠⁠⁠⁠⁠https://x.com/Jeremy_Deal?s=20⁠⁠ Contact us: [e-mail] Timestamps Spotify | (3:28) Podcasts | (16:13) Radio | (35:21) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

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Chit Chat Money. My name is Brett Schaefer, and it is just me on here today. We have an interview with Jeremy Deal from JDP Capital, and we're talking Spotify. It's not necessarily a pitch on the stock, but we're going to be going through, well, we actually just recorded it, so I know exactly what we talked about. We're going through some of the discovery tools that they're going after, some of the podcast stuff, some of the audio book stuff, some of the relationships with the music labels, layoffs, corporate culture, a lot of stuff around what the company is trying to build over the long term for their audio platform and the potential there, what's gone right, what's gone wrong, why he thinks the business still has so much potential

to grow over the next few years and beyond, and frankly, for the next 10 years. but i won't spoil the whole thing uh today we you know we don't have ryan on the show he uh as we've talked about before uh started a new day job so we couldn't join on this recording for the interview but don't worry he'll be we'll try to get him on for as many interviews as possible uh just for reference we do plan these kind of long ways in advance it does take a lot of planning for this show so we had some kind of in the hopper and yeah so don't worry about that he'll be back on, uh, for the not so deep dives and the power hours just like normal. Okay. I think that's it. Nothing else to hit on here without further ado. Here is our interview

with Jeremy deal from JDP capital. Welcome to chit chat money on this show hosts, Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Anything discussed on Chit Chat Money by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. All right, everyone, welcome in. Today, we are joined by Jeremy Deal, founder of JDP Capital. And I would say one of the, maybe we'll call him an expert, say someone that's very passionate knowledgeable about the audio space spotify in general has been following the company a long time jeremy welcome to the show and let's talk spotify how have you

how did you come across them and how long you've been covering the stock hey well thanks for having me on i'm a huge fan of the show um love the content and i'm just grateful to be here with you today. Thanks for that very kind intro. So we bought the stock, I believe, between late December 2018 and very early 2019. So after the direct listing, the stock had fallen about 45%, had been following what had been happening in the music industry with the collapse of the you know, the, the industry and then the resurgence of it with, with the transition to streaming. And, um, uh, it was really fascinated by the opportunity that was in front of Spotify,

not just in music, but in the greater audio space. So I think we paid about 115, $118 for our, um, kind of initial position. Um, and, you know, it's just been, it's been a rollercoaster since then. Um, it has not always been easy to own it. Um, it's been way up, It's been way down, but I think over the last four or five years, we've compounded about 14% a year in the position, which oddly enough is about where the S&P has compounded since then and in line with the gross profit of the company, the compounding of the company's gross profit since that time. So, you know, a lot has happened. I mean, I feel like the company is hardly recognizable today compared to then.

It's up 150% this year, and it just was completely destroyed in 2022. So a lot of that is just maybe offsetting a stock that shouldn't have been down as much as it was. But here we are, and yeah, just happy to talk about it. Yeah, there's a lot of moving parts to this company. For context for the listeners, we're recording on December 12th, 2023. and then i guess some other context we're not gonna hit the basics of spotify i know we talked about this a bit beforehand too about you know it's business model with the music stuff that's been covered ad nauseum um yeah i guess we were talking about if anyone is more interested in

the details of the music industry and how that relates to spotify and the streamers i'd recommend go listen to our 2023 episode back in june with sleepwell capital you can find that just in our feed, but maybe some context for you as an investor to see is give a short story of JDP Capital, because I think it's important maybe for the listeners to understand how you look at investing just before we get into things. Yeah. So we're looking for businesses that are where the business model is misunderstood by the market and where there's something going on in the macro. So a trend of some kind that's going to support change and a transition, normally a big transition happening in a sector that we can get in front of and figure out with

some kind of a margin of safety and ideally own the business for five, six, seven years. So looking for companies that can compound kind of like a private equity fund would. They don't all work out that way, but that's generally the lens we're looking for. So companies with unrecognized earning potential. And so we're not necessarily coming in with the business is, you know, a venture type of business, but where the business is self-funding, where there is a path to a really long growth runway that is just not priced in. Usually there's a degree of contrarianism or skepticism in the business when we actually invest. But then over time, that comes and goes. So when we first invested in Spotify, it was a very controversial

company. I mean, it still remains controversial around its business model, but we think that that's actually a lot, uh, quite a competitive advantage. And so, um, I don't know if that, that answers the question, but we, uh, we have a concentrated portfolio and Spotify has been a large position, um, for a long time for better or worse. I'm still believing the company still think the company has a lot of upside. And, um, one of the, one of the things I liked the most about it is, um, the, how underappreciated, um, this transition of audio to the internet has been. and the opportunities that that's unlocking and the value migration that's happening away

from multiple sectors and all kind of coercing into the digital companies, the digital apps that control the, that serve as kind of gatekeepers for the consumer. Yeah, and for anyone that's more interested jd jdp capital uh we'll have a link in the show notes as always uh to get more information on that uh but let's get right into it there's a lot of like as we talked about there's so many moving parts uh yeah and then we just have to choose one to go into first and the first one i have on my

list is kind of hitting on the advertising stuff which is the difference between the audio and the video advertising market how spotify strategy has evolved here i mean maybe you can just kick it off your overall thoughts on their advertising strategy because that's been the second pillar they've been trying to build people i think investors have been a little bit maybe they set expectations too high but i'm curious your thoughts because people have been a little underwhelmed about the growth there but overall thoughts and maybe i'll probably have some follow-ups there's two sure so there's there's two pieces i think of spotify in two pieces one is the is the music business and that has a business model that has been is kind of well

known now and is not necessarily the greatest business model on earth because they don't get a lot of leverage or they don't they get very little leverage um on but then they have um another bit they but a part of that that's just one part of their business model the other part of it is that they get um as as the pie grows um their search and discovery tools become more valuable so um labels and just anybody that wants to to to pay for search and discovery pays um and so that has the offsetting it's kind of a contra a contra account and so that has that has a way of increasing margin so you have kind of a good and bad and think of think of the business model for for the music as a little bit of a loss leader and the third leg to that is advertising and so

advertising originally was was part of the reason we invested is because i thought the freemium approach which is you know the the freemium approach the daniel x premium approach was was genius because um if you don't want to pay for the service you can listen to it or you can listen to an ad-based version of it so what it does is it mitigates churn so if you pay for the premium subscription and for whatever reason you can't afford it anymore or you just just get a new credit card in the mail and it takes you a couple weeks and you turn off on the premium you're not churning necessarily off the app itself so advertising supports that and um but advertising was always a small a small percentage of revenue i believe advertising is is compounding me since

we've owned the stock is compounded um off a very low base but at about 24 a year so it's not terrible but um they'll do a little over 2 billion in advertising revenue this year but there's a lot of nuances to that so initially um and i think to some degree today you know the value of an ad in in um in a music you know on the music side is is limited because there's just not that much information that spotify has on you um but as more more products are built and as they can leverage their ai capabilities which they've been working on for a long time we can get into that later that they can basically take pieces of information. So pieces of spoken word, pieces of a song, break it down into tempo,

break it down into bass, et cetera, and just generate search and discovery. And that allows more of an aggregation towards the super fan. So it allows you to discover music that you would maybe not necessarily discover. It increases the value of the back catalog for rights holders and for music labels, so stuff that was long paid for and just hasn't been necessarily at the top of the charts for a long time. And so you have an advertising model that is – the advertising business then breaks down – the model then breaks down to components of search and discovery and just showing an ad or listening to an ad. So we think that now with subscriber growth kind of hitting, I think this year, they added a little over 300,000 subscribers per day, so 110 million subs by the end of this year. As that grows, there's this interesting kind of convexity that happens with the algos that can come up. You can derive just so much more information when there's more people participating on the app to do different things.

So where you could infer, I don't know, you know, 100 million different things with 200 or 300 million subs, that may go to many, many, many billions with the next, you know, 300 or 400 million subs. So I guess I would say that initially, you know, when you think about the ad market, the value of the ad is only increasing. um and i think too we have to separate the value of the music ad and the value of the of the podcast and now going into audiobooks ad side so um for podcasts you know they spent and they spent roughly a billion euros it's been well documented um you know building a podcast business and they started building that in 2019 and really got going in 2020 and then we like a really nasty ad recession in 2020 starting in 2021. so um the market i think under appreciates the fact that they were just they were really building a podcast uh marketing business

advertising business really from scratch um it was just it was a very microscopic little industry didn't really exist in the way that it exists today and they were piecing it together with a handful with two two primary platforms and a handful of really small acquisitions and then to to to then on top of that once it was once the technology and the ad stack the ad tech was the ad tech stack was put into place you know go through a major recession ad recession it just has it has made on the surface it has made it appear you know like it was a bad investment and but we think that you know the the the advertising side especially on podcasts will accelerate faster in the next 12, 18 months than it has previously. So I think we're run rate 2.1

or $2.2 billion. And that should be a 50, 60% gross margin business at scale or if the employee base is right-sized as it seems like it's happening. Okay. We want to take another pause today to talk about our friends, Interactive Brokers, otherwise known as IBKR. We love Interactive Brokers. Ryan and I both use Interactive Brokers on a regular basis for our investment accounts. And the reason we love them is because they have the breadth of asset classes and geographical diversification. You can invest in options, bonds, stocks, and in all sorts of markets that you can't find anywhere else, whether it's the Nordics, where we like to research or down in Latin America, where we also like to research or in

East Asia, you can find stocks that are listed in all these local exchanges and you can buy them on IBKR plus so many other features that we've talked about before. If you want to check out IBKR, make sure to go to IBKR.com, member SIPC. If you are a professional investor, if you like doing a lot of research such as ourselves, which if you listen to our podcast, I think you do, you're going to want to check out IBKR and open and switch your accounts over there today. Yeah, we, as it's always funny talking Spotify, because a lot of people are listening to this on Spotify right now. And JetJet Money, we're also a podcast that is on Spotify. So we know the advertising. I don't, it's probably the right term is a recession, release the podcast market.

I know people can look at, say, like Google or Meta or stuff like that and say, hey, look, no, they're still growing. But on the podcast side of things, it seems like we definitely were in, I don't know, probably a bubble-ish on spending a little bit. And then now we're coming back to earth. Do you think they need to set up, like, has the groundwork been laid for what they're, at least from our point of view, as someone kind of is industry insiders i guess having this automated advertising network where you can set it up very similarly to youtube and you have to do minimal work on your end and it's more of okay similar to again the youtube example where you're not necessarily making a deal with the podcaster but you're having an advertising slot and then targeting to a specific consumer

does that all connect back to how you're saying that they have they're gonna you know year by year get better targeted capabilities does that make sense i feel like i was a bit confusing there yeah yeah no i mean it makes sense you know look there's a lot going on so let me just step back and and talk about how how i think about it so the the bigger the the bigger opportunity is is closing the gap uh the the monetization gap between audio and and and video on uh monetization on the internet. So part of the problem has been that you have an enormous amount of content that comes in in spoken word, and it's much more of an abundance, much more commoditized and abundant than even music, because at least music is more difficult to produce it. So you have this

an enormous amount of content, and you have a very, very low frequency of consumption. so part of the issue is is how do we it's not just about how can we just insert random ads into xyz small podcast and hope that the cpm goes up the solution and the real opportunity is to is to close that gap by by transforming the spoken word or what is on the internet and spoken word and this goes for audio books as well down to segments that can be repackaged and redistributed on other parts of you know maybe social media for example and i give you and i give you maybe just a one instance um i think about like you had a great your last uh your last show was going over some news and one of the pieces of news you covered the spotify layoffs 70 layoff um you know i heard

that same information on on why did i hear that same information on on yahoo finance for example why didn't i have and and what i heard on yahoo finance was a 30 second clip it was a 10 second was a it was a headline with a 30 second clip and some random guy just spouting out similar things why didn't i think what what you all produced was much richer much more authentic and much more interesting even even down to that same you know 15 or 20 second clip would it be much more interesting pieces of what you talked about, but why wasn't that what I consumed? Is it because I'm using the wrong platform? No, I'm using it on, I'm watching it on a platform that we all have access to. It's because the AI is not, what we don't have yet and what is happening is we don't

have necessarily a way to automatically take pieces of that podcast and convert them into sections, convert that into consumable content that can be consumed in small, small pieces based on relevancy. So you and I may have, another example is you and I may have a conversation that spans a wide variety of topics. And there may be four or five sentences of that topic that is, they're completely unrelated to the other bulk of the conversation. And it might be more interesting to XYZ group of people versus the beginning of the podcast, what was said might be more interesting to another group of people. Well, being able to, you can't necessarily manually know the opportunity to maximize the value of, of those, of those sentences.

So this is where, this is where, you know, I guess you could say generative AI comes in and what, pods, one of the acquisitions Spotify did in 2001, and just some other work that they've been doing in Gen AI for several years, this is where the advertising opportunity opens up. Because it's not just necessarily about how do we take a one-hour podcast that, you know, and try to convince people who have never listened to the podcast to take an hour of their time to listen to it. And they may or may not be that interested in it. Or if they want to listen to 10 or 15 minutes of it, they don't even know where to begin. So how do we, how do we create a product that takes pieces of that and allows ads to be shown depending on where, you know, regardless

of where it's, it's, it's being actually consumed. So if you're consuming this and going back to the example that Yahoo finance, well, why couldn't that have been your, you know, 30 second clip from your podcast? And why couldn't, and there were ads that were shown against that, whether I consumed it on X, whether I consumed it on YouTube, whether I consumed it on, on even spotify um there were ads shown against that the yahoo finance made money and this is how an example of how you should be able to make money but no i don't think that um we could just look at like i said long form content and hope that you know some miraculous way you're going to be able to insert ads that are really valuable and based on the personality graph of of the person

within spotify because spotify doesn't have information on you outside of what you're consuming in spotify but that doesn't necessarily it's not necessarily a bad thing and that's not necessarily a game changer that's what people are used to hearing as a bear case against maybe youtube for example but in going forward what we know um is that the capability exists and you can already see examples of it in your feed when you look at podcasts it's pulling out two or three sentences of a podcast as you scroll through to try to grab your attention and the sentences that it's pulling out um are somewhat customized based on based on your uh based on what it thinks you might be listening or might be interested in and the more products you consume on the app and the

more the more uh consumption on the app the more that that they can infer and the more that the algorithms can pick up and determine um hey this is this person might be interested in this short clip about this about this piece of information here or or that might be we might be able to take this clip of something you talked about and convince somebody to actually make that one hour investment in the podcast but i don't necessarily think that they in the future that you'll have to make that one hour investment in the podcast for them for in order to monetize it in order for the monetization to to be effective so this is where you know when i've said before and i've said in past letters this is where we think the modernization gap is somewhere

between i don't know call it 5x to as much as 50x between audio and and video so when you have these big step changes in technology for example the transition from the desktop to mobile unlocked we'd all know and we all understand the opportunity that unlocked in video and modernization of video but all it did for audio was move the recorded word onto the internet didn't do anything more than that so this is the opportunity um the bigger long term the longer tail opportunity that i think is actually right in front of us and is happening now um um to to drive um not only personalization but into driving you know um higher margin um higher value advertising and there's no other way that that spotify could even remotely get to the goals that it has

of you know i remember what is it 40 of revenue being advertising or something um but again they're about going coming off a very low base but there's no way they could achieve those goals unless they unless something like that happened so that's just um i don't know if that's that's a little bit too too much of a deep dive on that topic but let me know if that's perfect now that's totally correct the uh yeah yeah i i mean i think there's a lot of ways to go here i want to hit on the ai audio capabilities but one thing that i think relates to you said you know they need to get to this point that you just talked about uh the where they can five act they can bring you know the audio market into what it's like with video and have the stuff

you know where there's a version of it yeah or yeah or yeah yeah it's not gonna ever be the same we we don't expect it to be one to one but i mean you're talking about a base i mean that sorry uh you're saying so with podcasts specifically and with some of the other stuff relates here as well you have the competition with apple podcasts and they are maybe a not like dynamic app you know we've all had the issue the discussions are i guess in the podcasting world about how you know the discount downloads they don't have the tracking spotify obviously has a difficult relationship with them, with their two distribution platforms, Spotify for podcasters, formerly Anchor, and then Megaphone.

Do you think, how important is it for them to continue stealing market share from Apple? And if they ever got a dominant market share position, what could that unlock for them? What do you mean by dominant market share position? Because Spotify has the dominant market share position and paid subscription. for music on on on podcasts so i know they're they've caught up that they're they're winning but say like within podcasts you know we're still kind of in 50 50 on our show i think that's kind of the numbers out there globally what yeah what could that help like the advertising capabilities because it seems like when they have to do the advertising stuff with apple it's it's it's much

more difficult there's a lot of friction there well it's i mean i i think that the value proposition for listening to Spotify is very different. Each platform has its own value proposition. It's kind of like buying a car, at least a car that you drive. Some people prefer Toyotas. Some people prefer Volkswagen. Some people prefer Kia. I mean, they are just really different experiences. And Spotify's focus is just adding more and more value, adding much more value than they take and you know like they added 300 000 subscribers per day and you know this year and um this has been happening despite competition this whole time so um i don't necessarily think that you know i think the platform is is is large enough to be able to start um making inroads and

again you're talking about only a little over two billion dollar or 2.1 billion or 2.2 billion run rate based so it's very low but just back up for a minute i mean if you look at the let's just say this year consumption i don't know what consumption total consumption on the platform spotify is going to be this year but let's just say it's 150 billion hours um we'll find out when the when they file their version of a 10k um and q1 for 2023 year end but let's just say it's 140 150 billion hours if you spread that out um over the over the uh the the revenue of the the advertising revenue it's like a little over a penny a minute or a penny an hour it's it's almost nothing so that's that's kind of where i start and say you know it's not necessarily about apple versus

youtube versus spotify just looking at spotify's engagement and um you know the number of of hours consumed on the platform relative to the amount of money earned in advertising revenue is just mind-blowing. Now, you could look at that and just say, wow, that's really shitty. What a bad business. Or you could look at it and say, wow, what enormous upside they have, especially when you compare it to what people spend or how much is earned off of the average hour consumed in North America off video. So just to put a little more context to that, and these are really, really rough numbers. And if somebody has anything to add, please send me a DM me on X or send me an email or whatever. But in North America, let's just say roughly what we're seeing now in terms

of video subscription, what people are spending on content is on average about $60 a month. So Some people are spending a hundred. Some people are only have Netflix and spending maybe 20. And so this is a combination of content usually that is some is paid with no no advertising and some has advertising. So if you spend the average American, we're using the saying 120 hours a month of TV consumption and they're spending 60 plus dollars a month plus the amount of money. So that's, you know, 50 cents or something, 50 cents an hour. but then you add on top of that money that's earned on on behalf of that consumer spending 120 watching 120 hours a month so you add up the advertising revenue that's earned the small advertising revenue that may be earned on top of that so let's just say it's 60 to 70 cents per

hour that's being generated from the typical consumer in north america watching television so the u.s and canada you compare that to spotify's advertising so if you're on the freemium model, you're at 1.3 cents a minute or an hour. And let's just say that's double. Let's say in North America, you actually earn double. And the 1.3 is maybe not a fair estimate because it's spread out over emerging markets where the CPMs are really, really low and sometimes non-existent. So India, so let's just say it's double, right? Let's just say you're getting two or two and a half cents per hour compared to between, you know, let's call it 60 cents and a dollar an hour for video. So there is, I think my interest in our focus is just the size and the sheer size of the

opportunity. If you are a paid premium subscriber for Spotify, you know, there was something that came out the other day on Wrapped saying that, you know, some of the more heavy users of Spotify are the premium subs, people that responded to the survey on how often or how many hours do they stream Spotify. The average respondent that's a premium subscriber was like 27 or 26 and a half thousand hours per year. Well, there's many examples of people that spend up to 90,000 hours a year, especially which is roughly three, four hours a day. So think about a young person or that's really interested and that loves a certain genre of music or listens to a bunch taylor swift or somebody like me who consumes a ton of podcasts and a ton of information for

research um it's absolutely normal to for kind of consumers or paid premium subscribers um to to spend three maybe plus hours a day on the platform so if you think about let's just say the average of premium subscriber is at a hundred only 100 hours a month in in north america well now you're at like, you know, you're paying $11 a month. It's like 11, 10, 11, 11 cents an hour. And how much are they earning in on top of that? And, and, or how much is somebody earning in advertising revenue on top of that? So maybe like we said, maybe it's double the average of 1.3 cents per hour. So maybe it's two and a half or 3 cents an hour on top. So you're at 12, 15 cents an hour, best case scenario for a premium sub in North America compared to that 60, 70 plus

to a dollar plus, you know, per hour in North America and video. So the sheer size of the spread and look, there's a lot of ways to slice this. And you could argue all kinds of statistics. And there's people probably that have a premium account that never use it at all. And there's people that they're on it 10 hours a day because it's streaming and it's streaming in the background. And so maybe it's skewed. Somebody's account is skewed. I'm just saying that there's no way you could look at this and not see just a gaping hole that's a result of technology or AI that was not necessarily ready for audio when it was ready for video. Meaning, on the internet, we were able to monetize video much faster and easier than we were spoken word because a spoken word is just,

like I said, been taken the spoken word that was consumed on another platform, either radio or word of, or just between two people and put online. And that long form content is preventing the maximizing of that, of that value. So whether, you know, Apple could obviously do something similar. YouTube could do something similar. It's just the pie is so big. And I absolutely expect you know all the other platforms to follow spotify into to stretch audiobooks um and to fight using gen ai models large llm models um to to to slice and dice um podcasts and audiobooks and even music and to be reused in other areas to in order to to to grow advertising revenue. But I would say that, yeah, Spotify is an enormous platform that people love and

will continue to grow. It's 190 countries. They should be at a billion subs in three years or less is our thinking today. And again, you're coming off of a low base of advertising spend, and it's a relatively small market cap. So there's always competition. And I think the more that the competition embraces the ability to find a way to, or embraces Gen AI models to maximize the value of spoken word on the internet, it just kind of helps unlock advertising dollars and new creative ways to make money with audio that just didn't exist before. So I think it's just, it's a big, big, big, big pie. Yeah, and you mentioned how far behind audio is. It's very perplexing to me, or I don't even know if that's the right word. Podcasts started getting popular around 2010, maybe 2008, and it's kind of the upward trajectory.

and radio, linear radio, that's the same kind of style and terrible audio quality that's been around for 100 years, still has such a large market share in the United States where podcasts first started out there. So there's just such a long runway to grow for digital audio. One thing I want to hit that I think we talked about in our pre-discussion that I think is quite important is the semantic acquisition and AI-enabled audio capabilities. i know there was a rumor or not a rumor um i believe it was uh bill simmons at the ringer mentioned that they're training his voice to do ads in his voice that he actually doesn't say so

you can do these targeted advertisements that don't have to record you know a thousand ads with uh himself what do you what do you think about the semantic acquisition and how it connects to the thesis here what i like about for so for all the the the bad or the crap that Daniel Ek gets for capital on capital allocation. What I do admire about him is he, as I see pieces of Jeff Bezos, where Jeff Bezos would take small shots. And when something didn't work, he would shut it down. And I see that with Daniel Ek. What they do is they make very small acquisitions, most of which don't even have to be reported. So anyway, you can see kind of an aggregate what they've spent on acquisitions in the cashflow statement. So they buy small

little companies that think have an interesting team or interesting tech that can add value to their broader strategy. And I think this is just an example of that. They have made, we know about a lot of acquisitions, some were really small, 50 million or less, where they got some interesting tech or they got an interesting team of people or it wasn't successful at all and they sort of shut it down or it became the basis or the foundation for something really important for spotify whether it's the i think there's a story where they made a small acquisition that turned into what they now have today as as uh as the uh as the the music like playlists playlisting was i believe i could be wrong about this but i could believe the playlists were results of the

technology behind the playlists were the result of a small acquisition so i think this is just an example of um a small acquisition that that they made that is super interesting i mean yeah if you can take a podcast and press a button and change it to, you know, have it translated into tons of languages. I mean, it just, it just adds, it just opens up, you know, Spotify is in 190 countries. So there's a lot of languages. And if you can make that sound authentic, that is just, it's just an enormous tailwind. And obviously the probably even just as big of an opportunity there.

And we can talk about this is, is audio books. So that, That same tech applied to audiobooks just increases the TAM that much bigger. But again, just to back up to the bigger audio theme, whether it's just spoken word, whether it's podcasts or audiobooks or just even just deconstructing just two people having a chat, an informal chat. There's just so much that can be done with that that's not just simply putting it on the Internet. So, I mean, think about the type, think about text. When you, you know, if everything was, I mean, this was kind of, you know, there's some people that compare, you know, the opportunity in search and discovery and audio to kind of what Google did with text. And maybe it's obviously probably not the same. But just think if the only thing in the early days of the Internet, all you did was scan or scan things and kind of put it up on a server.

and that was it. There was no way to slice and dice it. There was no way to pull excerpts from something. Or just people wrote an article, somebody wrote an article and you had to read always the entire article. But we've evolved to a world where we can consume text, just pieces of text. You don't necessarily have to read a 10-page paper to pull out three or four sentences of something that gives you an answer to what you're searching for and so this is sort of the broader opportunity in audio and part of that you're going to have to have tools in the two-sided marketplace which which i i'm imagining that's where this will go um you're going to need tools that the creator can use to to make sure that their their the spoken word or their you know

their product can be can be consumed um not only on a frequency basis not only taken down to short form and and and consumed in many ways that probably they would didn't think was possible for but obviously in other people in other languages as well so yeah i think it's one of many many tools that that um are you know are necessary to in in the steps to evolve the monetization of audio the web yeah and that's a good segue to another topic that we discussed beforehand and i was i thought it was interesting how you framed it as the two-sided marketplace the discovery as the most powerful tool for spotify going forward let's say over the next you know five years or so yeah why do you think that well because you have as long as you have

as long as you have consumption growing um you're going to need you're going to need the more stuff that's that's on the the app the more product the more there is to listen to the more important search and discovery is so just think let's go back to the to the um um to the labels to the music labels as an example um or even fast forward to the audio the the or the uh not the audio but fast forward to the to the um the book publishers i mean it's a very similar dynamic we have a handful of you know maybe three core three or four publishers that control the industry so much of the music industry so the music industry um you know once they lost control as the as gatekeeper to the consumer um it completely changed you know it so they have

that so as sleepwell talked about there's two components to the music business there's the backlog or the back catalog and there's the the talent acquisition and they they need that to work in harmony it's kind of like a hamster wheel you know you invest you take this venture capital type of investment up front. And then hopefully, you know, you have this back catalog that you own forever that you can make money on for the next, you know, 50 years. And once they lost control of the consumer, because they used to control the consumer through CD, through radio, through the record shop, et cetera. I mean, they really controlled what you listened to, uh, what came out. Um, and it used to be that if you wanted to build an audience, you'd have to go sell,

you know, CDs on the corner for an hour or for a dollar or something, and try to get people to, listen to your CD and go somewhere where they can find you. So as that's changed, and there's just been an explosion of content out there, audio content. So, you know, just talking about music, it does two things. It makes the talent acquisition piece much riskier and more expensive for the labels than it's ever been, because they have to spend a lot more and they get a lot less for it. You don't have to give up your masters necessarily anymore. There's a lot of information out there on that. And the deals that are being done with artists are shorter term in nature, and they're just not as rich as they used to be. So that payoff that the labels used

to get is very, very different. So what becomes more important is maximizing the value of the that catalog that they already own. And when they do have a hit, when they do find something, you know, and maybe only have access to it for two years or five years or something in the, you know, the master, they really need to maximize the value of it. So paying to for search and discovery becomes more important than it's ever been in a situation where you just have, I don't know how many songs are on Spotify. Now people say a hundred million, but I think it's a lot more than that. And then you, then you add on top of that podcast and just audio in general, it's just an endless supply of two people talking and now you have audiobooks which again is just

endless endless endless amount of of listening that could happen so the the more that the barrier to entry or at least the access to the the to the consumer is taken away the more valuable the search and discovery piece becomes and not just on spotify but on all the platforms on tiktok on, um, on YouTube, on X, on all these platforms. So they're all going to kind of roll between, um, you know, some version of the, you know, the top of funnel and you're going to pay for that. And, um, you know, a lot of this content becomes a CAC or customer acquisition cost or something else that the owner, the rights owner wants to sell or was attached to that. Right. So you might, um, be willing to invest a whole bunch of money in a certain song or a certain podcast or a

certain book in order to sell, um, an adjacent product that, that really has nothing to do with that. Maybe it's a, an, a, a artist wants to, you know, um, um, you know, sell clothing or something, uh, something completely unrelated to it. So you need to build that super fan audience. And, um, so regardless of, of, of what the audio is, um, just like in text on the rest of the web and, and, and video, um, search and discovery is everything. And that's where ultimately the value will accrue and it'll accrue, um, to those, those platforms that have the widest, um, array of consumption and engagement on their platform. And, um, Spotify is one of those. It's just, you know, not a $2 trillion company. Yeah. So that's the bigger, so that's, that's the

bigger that's the bigger um that's kind of the the bigger story the bigger picture idea um and why i think the two-sided marketplace you know which was built you know started i less than 20 million in revenue um in 2018 um it's probably we're guessing it's 300 million in revenue usd roughly this year i think it'll be you know 10 of gross profit maybe next year the year after um but i think what they've learned um with that model is how to how to apply it to other verticals and audio books is the latest vertical that they'll be applying that to because you know it's clear that authors aren't really making any money i know i just listened to the i just finished the elon musk book um listening to it on on spotify with my 15 free

hours my premium account and i didn't i don't know how much money is going to that author but it can't be much um and so you know again like over time this is a you know the the opportunity to to to charge people for search and discovery um i think it's the is is an interesting avenue when you add on top of it all the tools like we just talked about like voice and and um language you know stuff like that translation uh publishing um digital publishing those are just tools that the way i think of them inside of a bigger two-sided marketplace that goes that goes beyond music. Yeah. And I think that's an example of that because for anyone that's not maybe super honed in on this industry, it can be hard to wrap your head around, or even if they

don't use Spotify, I showed with you before when we were doing kind of prep for the show is a new thing that they give out on the Spotify for podcasters, which if you don't know, for any listeners is how you distribute things is they give a Spotify impressions data source, which is not listens it's more of like how many times has it been cert you know your podcast or you know for us it's podcast but it could be music could be audio audio books could be whatever on the spotify home page or the spotify search results or in your spotify library and i mean right now for us they're giving us over a hundred thousand i guess it's free you know impressions uh at this moment because we're not paying for anything but that's very valuable you know they're surfacing

that stuff yeah discovery now they're doing the changes on the home page and kind of part of your thesis it seems like is that they've applied some of this to music and there's still a long runway to grow for music especially as you know they add 100 million users every year but that can also be applied to podcasts fairly seamlessly because it's not there are some nuances but when it's search when it's discovery they'll figure out the nitty-gritty but it's not that much different at the end of the day you're providing so much value for a podcast such as chitchat money or the millions of others around the globe, and they'll take a cut of that at the end of the day. Absolutely. The dynamic ad insertion product, moving away from the RSS feed, all that. I think

that the businesses being built on top of music, and I've said this from the very beginning of buying the stock, I think that businesses being built on top of music are going to be much more valuable than music itself. I think music is simply just somewhat of a means to an end. and um that is definitely not a mainstream view but that's how you know we're looking at i think the parabolic growth curve of the business is definitely in front of us and not behind us um and it's because and again why i think the company ended up being so bloated is because there's this um um there's this understanding with people that you know understand the opportunity um when you see the size of the opportunity i could see how you know how um you know it's it's

really a priority for the business or really a priority for for the team for daniel ek and the team to to really push forward um into these other verticals and apply what they've learned in music to their verticals that that i think could be that they don't have the baggage that the music deals the typical you know music label agreements have um so yeah like i mean it's yeah it's it's yeah it's interesting uh do you want to talk anything in audiobooks i do have uh we have we have something on the podcast content strategy which i know is a big i don't want to call it bear case but it's a gripe investors have so do you have anything else on audiobooks or should we get to the podcast uh content stuff um audiobooks i mean it's it's

interesting i uh the way it's evolved is not the way i thought it would evolve but i'm actually happy with it um like 15 hours a month with a premium subscription and then you have the option to buy more it's great i mean just think about again what i like about it is think about how how small that industry is so books what i read online this could be wrong and if i'm wrong please please somebody please correct me but i read it's not like 140 billion a year business just books publishing. Audio books are like 5 billion, but then streaming audio books. So where you're not actually purchasing the book online, like Audible, we just streaming the content is way, way less than 5 billion. I couldn't find a number on that. So I would assume less than half. And so what

they're doing is you're, you know, when they bought find a way books, which is the platform they're using to grow this business, which was the number one player in audiobook distribution and tools to creating audiobooks. What's attractive about that business is the margins are much higher because the platform where an audiobook is listened to generally takes somewhere, I mean, I read that Apple takes around 45%. Audible takes between 25% and 40%, depending on if you're exclusive with them or not. So let's just say, you know, 45%, um, because that's what Apple takes. Um, they'll take plus the, you pay for, um, tools to, to build. So if you want to publish, it used to be a really big deal to create an audio book, which is why there aren't that many

audio books out there relative to the number of books. Um, and there's, there's actually a lot of podcasts you can listen to on how to, you know, how to create and how to build an audio book. And it's just fascinating how difficult it is to find a narrator, to find to get into different languages. It's just tedious. It's difficult to find the right person to read it. And then the right person to begin and end on the same tone and, you know, to begin the book and end the book with the same, you know, without feeling it, without sounding exhausted. And to find a voice that actually resonates with the crowd, with the listeners in that culture, you know, in that country and that subsect of people. And it's fascinating. So there is a clear opportunity there. And I don't know how that's going to shake out, but I can imagine that it's going to be a big opportunity for the audio industry, for the audio book or just the publishing industry generally. And they may not realize it yet. Maybe they do, but it's been a lot of negative press because they're worried what happened to music is going to happen to them, meaning all the value goes to the very top percentage of books, the most successful books.

But I think it's just a fascinating opportunity because you're starting off just such a small base and you're marrying something that's so important to the average person, just consuming books with 600 million subscribers and a revenue base, an industry revenue base that's almost laughable how small it is in size, which is where podcasting as an industry was just a few years ago, two, three years ago. So, so I just love that, that setup. It's to me, it's just, it's interesting. There's just a lot of ways to win a lot of ways to the top of the mountain. Yeah. I mean, it seems like there's a ton of opportunities there and it's hard to kind of formulate what their thesis is so far, but hey, they've been very successful. I think no, even the most bearish person on Spotify cannot complain.

They make a good product for their users. And I wouldn't doubt that they do that with audio books as well. One thing that I mentioned before we talked, audiobooks, that a lot of investors complain about, you see it in all these news articles, is the podcast content strategy, spending all this money. They had the bad deals, I think they would admit, with kind of going after some celebrities for some hype, the Kim Kardashian deal, the Meghan Markle deal. and we talked about before about how why this may not have been a mistake and those specific ones obviously weren't the greatest deals but i kind of agree with you there and i'm curious your take you know uh how spending on joe rogan spending on the color daddy show spending on some of these big shows to make them exclusive or just within their network why it can be so valuable for

them and why they might be getting good returns on these expensive looking deals i think it's very easy for the for the media to talk about these high profile people like the megan merkel situation i mean my understanding is that i mean i don't know how much they lost but it wasn't much it's a very much it's just pocket change um i think that you know if you back out the joe rogan deal um how much was actually lost in content um you know content that they produced i just don't think it was much. And I think, you know, that's part of the recipe when you're inventing an industry is you're going to have to break some eggs to make an omelet. I mean, if we applied this to any other industry that was a startup that was just starting up from really from scratch,

of course, you're going to spend 10 basis points or 20 basis points of revenue or gross profit on trying a whole bunch of things and seeing what sticks. The bulk of the money was spent on the platforms um that they acquired which um were were home runs i mean you you could not let's let's invert this um could you spend 1 billion today and be in the place that spotify is in with podcasting absolutely not absolutely not there is no way that for 1 billion that a platform of its size could press a button and have i don't know 50 60 whatever i don't i don't i i'm afraid to say what i what i think that consumed hours and uh outside of music is but let's just say it's 30 or 40 billion hours a year um to press a button and and own an industry like that or

maybe that test technically they're in second place uh to apple sort of uh if you just look at podcasts or whatever but um you couldn't replicate that for a billion dollars or a billion billion euros so yeah they broke a few eggs along the way so what it makes for great headlines because you're talking about celebrities longer term um i don't think they want to own any content i don't think that they're a content business youtube doesn't own any content necessarily i mean they don't really own they're not really in the content ownership of podcast business and i don't think that um that they necessarily that that spotify sees itself as a content owner i think they had they felt that they needed to acquire some some famous people and initially

and produce some podcasts on their own so they could experiment. Think about it as McDonald's. Like McDonald's is a franchisor, but they still actually own a handful of their own stores. Why is that? I believe that one of the stores they own is in Paris. It's one of the highest grossing stores in the world.

The franchisor will always keep a handful of stores so they can learn, so they can test things. And I think that, yeah, maybe Spotify will always have one or two things that they own, maybe. But I don't think they necessarily want to be in the podcast content ownership business. I mean, they've talked about this extensively. But, you know, when the industry was just getting going, I think it made sense to, like

I said, just to experiment, get some people on the platform with some high profile names and with the goal of bringing on other people's podcasts of highly produced content onto the platform. And I think that's been very successful. So I don't think you can name, you know, a list of successful podcasts that are not on Spotify. So whether they're owned by whoever owns them, name any of the competitors that also produce content that you can generally listen to everything on Spotify as well, because that's where the consumer is. That's a key place where the consumer is. And so in a way, they've won.

And if you look at that as a return on investment, it's been a great investment because they now are, you know, what they want is the New York Times. They want everybody to put their podcast through onto the platform and use their dynamic ad insertion to decide how they want to get paid. Do they want to get paid in a subscription? Do they want to get paid in ads? How do they want to share that ad revenue? do they want to how do they want that to look how that what kind of ads do they want shown against that content etc so that's really the long-term goal and i think people are completely overreacting to this you know this spend um again even if you look at the total

1 billion it's just not a lot of money um especially relative to how much money the the the music side of the business makes we didn't really talk about we haven't really really talk about financials yet, but, you know, it was from day one, we could see that Spotify just prints money. I mean, it's actually, you know, I know it doesn't on a gap basis make money, but we think the, you know, the music business may require a thousand people, I guess. I mean, look at Deezer. Deezer has 600 employees. I mean, I know it's a much, much smaller business, but how many employees do you need to run that core music business? So I think it's a little bit like Amazon back in the, you know, a decade or two decades ago, and everybody complained about

profitability, but there was actually, it was actually a very profitable business that was reinvesting a hundred percent of its gross profit back into the business. And I think that's what was happening. I think you have a core music business that's making somewhere between 1.5 or 2 billion euros. If you were to take it down to its bare bones status and say, okay, how many employees do we need to run this? Maybe it's a few hundred, maybe it's a thousand employees um compared to let's call it three billion in gross profit um you know it's a very profitable i think it's a very profitable business it's just that they've chosen to reinvest that um and they have a long runway to do that because they you know they make enough money on the music

side so again yeah i think the podcast stuff the the one billion invested is is a again a drop in the bucket and something that couldn't be replaced and we will look back on as a genius move Yeah. And you mentioned financials. We're going to think as we wrap up here, we have a couple more questions. So we're still going to go for a little while. Yeah, sure, sure, sure. Come back to a little bit more of the financials, a little bit more of the investment things. I know all that stuff connects together to their long-term competitive position. I think maybe first, this is a bit of a smaller one, but the price increases on the music side of things,

I think from my seat is a bit underappreciated. Actually, well, it may be appreciated a bit better now but after they did the price increases it's it's been a little bit more appreciated um i think two things there one how much can they continue to raise prices in these wealthier markets because i know i always like to ask friends since you know i'm still i'm very interested in following the stock you know it's boner for uh sometimes it's been on it's been on my watch list for a long time um and i say hey like look they did you see that they raised prices uh and they usually either say like no they didn't even notice because you know the value is so high there yeah yeah they raised it by they're like how much did you raise it by and they're like oh they raised it by a dollar

and like oh yeah i mean well they could raise it to 20 i'm not going to cancel and then the second thing i want to talk about uh is the better potential unit economics they get when they raise prices for these new dollars that they're sharing with the labels? Yeah. Pricing power is a function of how much value they're delivering for the consumer. So I think if it was just a music app, it would have less pricing power than a music app plus podcasts. If it was just music and podcasts, it would have less pricing power

than music podcasts and audio books. So the more value they add, the more people are willing to pay. And I think with audio books just getting started, it just makes $11 a month seem like a very, very small amount of money. I mean, you know, it took Netflix a long time to raise their prices above $10 a month. But when they started, once they realized how hooked people were, and again, this is in the face of YouTube, which people talk about millennials and everybody just watches YouTube all the time. But Netflix just has produced incredible pricing increases. You know, they've proven pricing power and resilience there just by all the competition, an enormous amount of competition. You know, Apple TV, you know, in front of all that.

Amazon, they still are able to keep on increasing prices. I think it's over $20 a month. Is it $19.99? It's $20 a month or something now for the ad-free Netflix subscription. So, yeah, I think there's – as they add more value, they can increase more. And I think it's a very undervalued service now, especially with audiobooks. Absolutely. As we know, just listening to earnings calls, they hesitated.

They weren't raising prices before, not because they didn't think they couldn't, but because they weren't getting any leverage from the labels. And I think they held the labels feet to the fire and said, you know, spend what I think happened. And I think this sort of echoes with what Sleepwell was saying on the interview in June that we talked about at the beginning of the conversation, was I think that the, you know, it needed, the labels realized like, okay, wait, wait, Spotify is, you know, if you look at the risk profile or the risk section of the music labels, you know, Spotify is the very first, in the very first section, risk section. I mean, it is, you know, it's a very important part of their revenue model and their, their financial profile and, um, they're set up for growth and the expectation of terminal value in the music labels is linked to the ability of Spotify to be able to raise prices. So, you know, that huge multiple that are high multiple that you're basically paying for a, for a, for universal music, because it's, you know, a steady Eddie kind of mature

business with high returns on capital. Well, if something were to happen with Spotify, that would change. They need Spotify to be able to move forward and raise prices in order for them to also grow. And yes, they're doing business with a lot of other people as well. They're doing business with TikTok, they're doing business with Apple, they're doing business with Amazon, et cetera, but all in very, very different ways. The way they do business with TikTok is very different because it's short. It's not as much of a music consumption business. The value of a 10 or 30 second clip is different than listening to a whole song on Spotify. So Spotify is a really critical piece to the growth trajectory of the music labels. And I think Spotify recognized that

the leverage they had and negotiated better terms. And they've said basically that on earnings calls that they now have the leverage to move forward. And what I think the leverage is, is more spending on two-sided marketplace, which would completely make sense because the research we've done speaking to people at the labels, you know, they don't think that they spend much with, you know, the ROI that they get on the two-sided marketplace is generally very high and, you know, roughly $300 million, which I think it is roughly what it is in 2023. It's just not a lot of money. Again, these are small. We're still on a very small base here. So they could absolutely spend

more. It makes sense for them to spend more. And I think they can also retain the structure of the deal that they had before and just show the same leverage that they're getting. They can show price increases on their side. Labels can show the benefit of the price increases from Spotify flowing directly through. And maybe all they have to do is move around some of their R&D and marketing budget over to the two-sided marketplace. And there's probably a schedule to do so. And that is very win-win for both sides because Spotify gets a bump in margin because it's, again, a contra revenue line item, which it's margin expansionary, but it's a contra account so it just it gets billed as a um a reduction in the amount of money that's that's

that's paid to the labels if that makes sense and um and the labels retain their their their model that you know so uh i think that that has opened the doors to potentially more price hikes as spotify adds more value to their their user base so i could see it being depending on how much they add you know there's there's a next there's another as a fourth vertical coming um we don't know what it is but a guess is that it's something in education um you know as more and more things are added to the platform um they can add more they can add more stuff but even as it is now it's undervalued so i think pricing power is definitely not the the question here it's more about the the deal they got with the labels which i like i said i think that what it is is more

spending on the two-sided marketplace, which comes out of their R&D or sales and marketing budgets. So more to come. It's probably just the beginning. I think it unlocked what could be a cycle of raising prices going forward. Yeah. I wouldn't be shocked if they added once every two years or something like that, and nothing changes but churn, especially as adding more value as as you mentioned now today they're and it might be different because i know sometimes it's tough since they report in euros and the currency stuff can make it be slightly different depending on what source you're using at what time but they're closing in on three and a half billion dollars in u.s dollars uh in gross profit on a trailing 12 month basis or they'll

probably be close to that in 2023 with that context in mind how large maybe from both users and you know financials is spotify's market opportunity so we have them doing 3.4 billion euros in gross profit this year so it's whatever 3.6 3.7 dollars um um we have them doing something like four billion next year maybe getting close to that and and five billion run weight run rate by exit 2025 so um i think it just the opportunity is more in the margin expansion um it's also in top line growth for sure um generally 40 percent of of freemium converts to premium and as there's more reasons to convert to premium like audiobooks and the fourth vertical that's coming um and a better experience um on audio but or with with

podcasting you know i wouldn't be surprised if they can continue that 40 conversion rate so yeah you have you have opportunities kind of all over the place to make more money there's so many that what i like about spotify is unlike a lot of most investments that that we make there's just so many paths to the top and and over the years i look at our internal model and i just see how it's changed and grown and how we were so wrong about other things but so right about other things but then in the end it all sort of matched and worked anyway because you know something went up here went down over there and it's it's just an interesting company it would be like trying to underwrite maybe, like I said, we talked about Amazon earlier, underwrite Amazon 10 or 15 years

ago. There was just a point, not that it's going to be Amazon or it has that kind of upside, but there's a point where you just have to kind of have a vision and you need to see that the team is executing on that vision and that the vision is backed by just an enormous market opportunity, just a wide open market opportunity and that they are the dominant or a dominant player with the financial resources to execute on that and so i don't know how big it can be but i think it can be materially bigger than what it is today so you know just looking at the next 18 to 24 months um let's say you have you know let's say and this could be too optimistic so don't hold to this and um but exiting 2025 like a 5 billion euro um run rate gross profit and we're hoping

that after the layoffs that they're gonna that they can hold their total expenses to run the company around 3 billion um there's an analyst that came out yesterday i forgot who and raised her price target to 300 euros per share or dollars per share sorry um based on very similar math but for 2024, saying that he thinks that gross profit next year would be $4 billion and costs, they can get costs down from $3.4 billion after the rifts to roughly $3 billion next year. So that is roughly works out to about a billion in operating earnings or EBIT. So, you know, I think the market is probably looking even past that and discounting maybe

2025, which looks, you know, two plus billion in EBIT. And so, yeah, it's, you know, that's kind of where I think, where I think about it today, but it's that inflection, you know, this company has been hated for a long time. I've had this conversation with, with even other tech investors, among people that I know that are really good tech investors, very few of them, some of them, but very few of them either have an opinion on Spotify or continue to own Spotify, you know, after maybe owning it in the past, because they're just confused on how things are going to work out and they're tired of waiting for this inflection to happen.

I think with the rifts that happened recently, you're now going to see underneath the hood, the earning power that exists now under the hood, which was not really visible before, and it's going to open up and you're going to also see... you're going to see the earning power going forward a lot easier as well. Because by seeing what's under the hood now will allow people to extrapolate the next 24 months or 18 or 24 months a lot easier than they're able to do today. Because I don't know, street consensus was like 500 million in operating earnings for next year. And that just seems like in 2025 or something like that. And some of these sell side reports I read are like, yeah, maybe the thing will make

a billion dollars by 2027. You're like, are you kidding? No way. Like the stock would not be where it's at. If, if the world really believed that that's all the earning power that it had was a billion dollars by a billion euros by 2027 or 2026. So I think that these riffs will show people a little bit, give people a little bit of a glimpse into what's going on or the varying power of the business and what is capable going forward as we start to get leverage in some of stuff we just talked about. Yeah. And you just mentioned the layoffs. I think if you don't have anything else on that, that's all right. But what are your thoughts on their corporate culture in general? I know a lot of people have, as you mentioned, investors

are quite negative on their corporate culture. So what are your thoughts? And maybe thoughts on the CFO transition too. CFO transition, I guess, makes sense. I don't work there. I'm on the inside so i don't really know but i guess looking back and reading daniel x letter totally makes sense um you know somebody said on twitter he's a zerp era cfo and maybe that's true um it's a swedish company so it's very different culturally than an american company in america we've had you've gone on a very long list of public companies that have done major layoffs this year major layouts so from salesforce all the way down well i guess twitter or X laying up 80% was pretty extreme, but a lot of the small caps I cover have even had

pretty big rifts and not just in tech, by the way, but across the board. So there's been a lot of right-sizing that's happened this year, but tech it's been, you know, I'd say 10 to 25% layoffs generally across the board and stuff that we don't know, but just cover. I mean, you could just kind of Google it. I mean, it's Twilio, it's Appfolio. It's, I mean, just, just a long list of these companies that have laid off it's, it's meta, right? It's Google. They've laid off just tons it's amazon that laid off um i don't know what percentage of their their white collar workforce they allowed it was like 18 000 people uh white collar and i don't know what percentage of their total that is people refer to it as a percentage of a million plus workers that's not

right because you know they were laying off corporate people and not people on the front line you know at the warehouses or in the grocery stores but um you know so everybody has gone through this so i think this just needed to happen it's happened later than it should have the company has been overstaffed for since it's since it went public and my sense talking with a handful of people that have worked there or working there i've always heard that the company is overstaffed but i think there's some cultural differences um if you look at the 1500 people that were laid off in the spreadsheet that's going around and most of them are u.s people many of them are in new york so very high you know very high uh um salary people it's not just the salary

though that's going to save costs it's the cost maybe around that person what the person was spending and and the social benefits um just the u.s you know the employer taxes associated with that which can be you know 15 of the person's salary so um i think they can absolutely save you know my my guess is this is 350 to 400 million euros in savings and it'll happen immediately from what i understand everybody was shown the door and um given five months salary so you're going to have a big, big hit, one-time hit on next quarter's earnings. And then after that, it'll kind of be bygones will be bygones. So I don't know about the corporate culture. My sense is that it went from a very decentralized kind of work environment to now a much more trying to

centralize the work environment and get a lot more control over what's happening in the business. That's just my sense. I mean, from what I know about other Swedish companies that I follow, Um, it's a very, they're very, they tend to be very flat organizationally and, and, you know, Spotify being a big global tech company can no longer, you know, if they want to be a player and become a, you know, you know, two, two, two, three, 400 billion market cap company someday, um, they're going to need to be, to look more like a U S company from, from that perspective, be a much more aggressive, um, hold people to the fire more, uh, be quicker to fire um do more with less and um and not be such a flat organization where you know maybe

everybody has a large number of people have input into a decision maybe decisions need to be um you know it's more siloed and i do believe that's happening at the company but um just i'm just comparing that to maybe what i know about culturally about other swedish companies i do think that's what what what separates them from other smaller swedish companies that just can't find their way out of scandinavia is um spotify is willing to do whatever it takes and it's very clear with daniel lack and lorenzo that they're willing to do their board is is a global global player board and um they need they'll they'll do what it takes to be to be successful and so um yeah the riffs were were positive i think yeah i guess the cfo had to go

Zerp CFO. I don't know. I don't know what really happened there. They clearly had too many people, as you said, versus a company of their size. As we wrap things up here, this has been a fantastic discussion. We had a lot of things, reasons to be optimistic on Spotify, the podcast, the advertising, the AI stuff, the discovery, how it all connects together. I think if listeners picked up you know we try to stay neutral as the interviewers here but i'm also optimistic on the potential of the platform as well we got to talk pre-mortem you know we've asked this forever uh company what you know why does the stock perform poorly over the next decade don't you wish you could just hit skip on the worst parts of your life you know the same way

you can skip an ad i get it i'm ciaya and i live in ice cove i've made some questionable decisions that didn't end up the way I planned. And today, I'm still figuring it out. Somehow, things usually get worse before they get better. Apparently, that's how I roll. So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem. When WestJet first took flight in 1996,

the vibes were a bit different. People thought denim on denim was peak fashion, inline skates were everywhere, and two out of three women rocked the Rachel. While those things stayed in the 90s, one thing that hasn't is that fuzzy feeling you get when WestJet welcomes you on board. Here's to WestJetting since 96. Travel back in time with us and actually travel with us at WestJet.com slash 30 years. The easy answer is that they just can't grow.

You know, every company, every stock needs every company to be successful. It needs growth. And if for some reason they just can't grow, and that's a combination of things, a combination of users, they still need to get their user base. I think their user base needs to be bigger. 600 million is a little bit small relative to their real heavy hitters, relative to YouTube and Meta, which both have more than 2 billion users. You need to get that user base up, and they're doing a really good job. But I think that that would be one reason. Second, there could be some technology out there that we don't know about today that's being created in some Silicon Valley garage.

um that um snatches the eyeballs away uh that moves the consum the way the changes the way that we um you know the how we um consume things or the attention you know that takes our attention away from apps like spotify and youtube and takes them somewhere else um i don't think that the death of spotify has anything to do with crypto i remember that was a little bit of a scare back a couple of years ago, people thought, well, if you just change the way music is owned, then it would just disintermediate Spotify. But Spotify's value add is, again, aggregating and searching discovery, which has nothing to do with the ownership of the music. So I would say those two things, if it can't grow or growth stalls, and they just are kind of

subscale, which they are, like I said, subscale relative to the really big players, um and or um there's just some sidewinder technology that comes out and just says hey we no longer um we no longer consume you know our music on on these apps we we do it somewhere completely different um that those are the two things that come to my mind um of how you know potentially you know there could be some component to you know lms could we talked about all the all the benefits to spotify but these lms are also benefits to anybody at the on the on that that end of the stack where you know that on the on the on the the um the application side so the it's the same reasons that spotify the same opportunities that spotify has and and and um gen ai are the

same opportunities that apple has the same opportunities that google has and um facebook etc so um it's not going to be it's not going to it's nothing is a slam dunk and we need to be humble and stay humble and be willing to say hey you know pull the plug if we need to but um up until now i've just seen there's been really encouraged with the progress i think the progress that's happened in the last quarter especially with the layoffs is really a step in the right direction. So as long as the valuation doesn't get too far ahead of us, you know, it's a mid thirties billion USD market cap company. You know, it's, it's not egregiously valued. And as long as that doesn't change, I think it's just, we just kind of watch it closely and see how things

develop. All right. That's a great way to end things. Thank you again, Jeremy, for joining us now, where is the best place? We'll include these again, as I mentioned in the show notes, where's the best place for people to find you uh people want to follow um the fund it's jdpcap.com and if you're a qualified and accredited investor you can sign up and um get our get our stuff as we you know get our distribution list and i'm also on twitter a little less active or x i guess i'm a little less active but uh try to try to post things from time to time but definitely check it so feel free to dm me it's jeremy underscore deal and um those are probably the two best places to find me all right let me hit the disclosure uh ryan and i are not financial advisors and nothing

we say on this podcast is a formal advice or recommendation ryan me podcast guests may hold securities discussed in this podcast may have in the past right now or may buy or sell them in the future thank you everyone for again for tuning in and we'll see you next time the royal canadian legion is celebrating its 100th anniversary and now our change has a two dollar coin to mark this milestone honour the Legion's mission to carry forward stories of service and sacrifice to new generations, and their dedication to supporting veterans and their families from coast to coast to coast. Celebrate this enduring legacy.

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