Good Investing Talks - Can Spotify be the leading audio platform, Jeremy Deal & Sleepwell?

Episode Date: October 13, 2021

This is the second part of our discussion about the future of Spotify. Enjoy!

The audience, it's great to have you all back for a second hour episode of our talk on Spotify. Today, we are doing a deep death on the company. And I'm very happy to welcome Jeremy Deal and Sleepwell Capital. It's great to have you on, guys. Great to be here. Thank you, Tillman. Thanks for having us back on again. That's great.

You're back. So maybe let us start with the question, what kind of animal is Spotify in your eyes? and try to define what Spotify as a business is. Is it a streaming service? Is it a platform? Is it something else? What is your definition of Spotify? Sure.

So maybe I'll start. It's not the easiest question, especially because as we, most of us that have been following it for the past couple of years, no, it's, it's been evolving at a rather rapid pace in terms of its, of its strategy. but I guess the most recent definition in my head, the way I think about it is the only focused and scaled audio platform in the world. That's kind of the one-liner for me. It's not only a music service as it was, if you look back as short as four years ago, but it's really going after the entire audio market nowadays.

So its strategy has changed a lot and I expected it might look something, something different if we think five years from now. Yeah, and I would echo that. I would say that it's where it started. How people know the company maybe four or five years ago is kind of behind. I mean, it's evolved. It, like all great companies, it started one place and leveraged itself into a very different place. So as an audio platform, that transition from just a music streaming business to truly an audio platform is a really important differentiator because it becomes a really important tool for the creator and also just kind of a must have for consumers around the world because it's an enabler for the creator and the fan to interact in a way that wasn't really possible before.

So to try to summarize your answer, you miss a lot if you define Spotify just as a play on music or? Yeah, absolutely. I would say that. To be clear, if you look sort of the total listening hours, the majority, the vast majority of that share is still in music. But as we've seen from the recent investments and shifting in narrative and focus, it's much wider than that. Not only podcasting, but we've also seen them going to live audio, also known as interactive audio. So I think we'll see them attacking new frontiers when it comes to the audio market globally. Yeah, not that there's anything wrong with the music side. I mean, I don't think it's, I think the music could potentially be,

what will continue to be, you know, a really important part of their business. But on the music side, it's easy to say, oh, look at this other business they're getting into and just look at it as an audio business. But the music side has an enormous opportunity. So it's not necessarily that the music is sort of at maturity. It's just that music and the prior way that was used, the prior way we think about monetization of music is what's changing quickly. So yes, Spotify is more than just music,

but just looking at the music side, there's an enormous opportunity. So I think that's important as well. You already mentioned at Sleep that Spotify is unique. How unique are they and how are you both thinking about a competitive landscape of Spotify? Who are they competing with? I think the biggest competitor is radio. I mean, Daniel Leck talks about that and I see that, you know, when I travel around and get an Uber's in countries, I mean, I was just in New York for 24 hours and I took a series of Uber's. And every Uber

I was in just had, was listening to the radio. I mean, it's, it's radio you could think of as having almost 100% market share everywhere in the world. There was a study done recently where they looked at the radio listening hours in 21 countries was like 2.4 hours a day. So in places like the U.S., it could be higher. So, I mean, radio is by far the biggest competitor to Spotify into streaming in general. Yeah, I think that's actually a very interesting way to think about it. Jeremy, and perhaps not the most intuitive one, but absolutely I agree with you when it comes to

the, you know, the big prize or the opportunity when it comes to the total share of audio, radio is still on a global basis, the biggest, you know, what's capturing a lot of that share. So in that sense, it makes sense for them to go after that and do as much as they can to bring all of those, or as most of those listeners as they can online. When it comes to, on the other hand, when it comes to, you know, sort of pure music streaming companies, naturally there's competitors that offer similar products to Spotify. The biggest ones being the, you know, the big tech companies that we, that we're all very familiar with, obviously, Apple with Apple music, is the, is.

is the second player. Just to be clear, Spotify does lead with roughly a third of the market share when we look at music subscription streaming specifically. So you have Apple after that and then closely followed by Amazon and then Google with YouTube music. And then you have a bunch of much smaller players, most of them scattered across different different regions. And, and, you know, if you look at India, for example, there's, there's, a lot of, a lot of players that are very strong locally, but then have no presence in, in other

countries, et cetera. So it's a very, sort of very competitive landscape when you, when, especially when you take out the, the big tech companies. But I think the, there's a couple things to, to keep in mind when we compare Spotify to these, to these other players. The first one being that as I mentioned in the beginning, Spotify is really the only global one that's purely focused on not just music, but also audio. So there's no really a pure play competitor that's doing something like Spotify out there. For the tech companies, in my opinion, music is pretty much a distraction for them. and they don't really have or seem to have many intentions to make much money from that part of the business.

It just serves as an additional service for sort of a greater bundle in the case of Apple Music. I know we were talking about this yesterday, Jeremy. I thought you had a very good point in talking about cloud and storage where they're basically bundling music and arcade and news with a more sort of relevant offering when it comes. to iPhone users. So in the case of Apple, I think that's very relevant. In the case of YouTube, people are really just focusing on the video. And if you look at the statistics that Spotify has talked about in terms of engagement, they say it's usually anywhere from two as much as three times higher than the competitors. So the evidence points to the Spotify product being much superior to what the competitors are offering. And I think those numbers,

are pretty compelling and as well as the fact that they're a lot bigger as well and they've started to increase prices without much or without any impact to their business so yeah and i'll just echo that is one of the reasons i think you don't see the numbers broken out for example for for apple music because i don't really know if you can break them out in the same way i mean so apple apple the what you get when you when you upgrade this for storage when you buy storage. So let's say you get that famous warning that says you're almost out of storage. And, you know, people might look at that and say, well, if I don't buy storage, I'm going to lose these important videos or pictures or whatever. Maybe you don't have time to go

through them. And so there's this constant reminder that you're almost out of storage. And over time, people are buying more and more storage for their phone. And with that, ICloud service, you get bundled in music and other things. So what we don't really know is if it was a stand we don't have as a true standalone product to compare, for example, Apple Music with Spotify or the same with YouTube. When you watch YouTube, anybody that watches YouTube and doesn't have the premium service is familiar with the screen that pops up every single time you open the browser and it says subscribe for one month, you know, free trial, whatever, for the, for the premium service.

And with that premium service for YouTube video, you get access to music. You get YouTube music as well. So it's, it is a different animal. For these other companies, it's kind of a, it's an auxiliary product. It's, it's just a feature. And there's streaming catalogs. And I encourage anybody that doesn't use Spotify to just download Apple Music and play with it. and compare it to the selection and the interactiveness of Spotify, the recommendation list. You know, when you're there, when you, when you, when you see a, you know, when you see on Spotify a, you know, some of the music lists, for example,

the lists you see are going to be different for each person. So the recommendation engine is to getting more and more superior as time goes on, kind of like Google Search gets better and better every time somebody uses it. And that recommendation engine is becoming more and more important as the quantity of music increases. And so as more do-it-yourself artists, DIY artists emerge, because costs come down to publish, and the same with podcasting as the tools to produce an excellent podcast come down and cost, the more content's added and the more important that, discovery feature is.

And not only the discovery feature, but the ability for the artist to be able to find and identify their fan base and figure out how they want to monetize them. And that is a fundamentally different value proposition overall than just a music catalog where you can type in your favorite artist and have it play. Like, for example, with other streaming services. So, yeah, the competitive landscape is. is when you really play with the different products, maybe you're somebody that just says,

I only want to listen to the same YouTube song every single day for the rest of my life. Well, then maybe you wouldn't see a big difference. But if you interact with artists, if you interact with music, if you're interested in music, and you're open to listening to new things, and you're interested in the discovery feature, Spotify becomes a tool that, you know, it's hard to live without.

Is there any competitor, Spotify has to fear in your eyes? I think, yeah, maybe just to, there's two that come to mind, because obviously, in any business, you always have to be cognizant about, about the competition and really understand what they're doing and what the landscape is, right? So when it comes to the big tech companies, it's not something I worry about a lot, especially when I look at Amazon and Apple. But, you know, YouTube, I think, is definitely one to watch closely because, you know, in some ways it's the biggest music app in the world.

There's over 2 billion monthly active users globally. And I think the last stat we heard was something like 25% of them engage in music listening or could be even higher. So you're definitely looking at a platform that's very much associated with music. What makes me comfortable as it is right now is the fact that I don't think they have prioritized their strategy in any way to become. become an audio platform. There's still number one priority is video and makes a lot of sense for them as well because it's, you know, it's much higher monetization when you think about in terms of like advertising and things like that.

So if they do end up shifting their strategy to become, you know, more focused on capturing the audio share, that's something I would watch very, very closely. So, for example, if you open the YouTube app in your phone and you're not a paying and you're not a paying subscriber, as soon as you close it, if you're listening to something, it's going to stop, right? And I think that's a way for them to try to make you pay for it, right? But if they really wanted to go after this market, they would just give that out for free and sort of try to change that consumer, consumer habit. and even end up competing more directly with Spotify. So those are kind of some of the things that I watch for for YouTube specifically. But again, we haven't really seen much evidence that they're shifting their strategy in any major form.

The other one I like to keep an eye on, especially given how disruptive they've, they've been in the social media space these past couple of years is TikTok. A lot of people obviously associate TikTok with music. I don't think it's, so I don't think of TikTok as purely a music consumption, you know, application, but it is a very important music discovery tool. And obviously, music is a big part of their, of their platforming. in general, they did launch a streaming service this year, I think earlier this year or last year, but it basically launched in three markets.

And we haven't seen any more recent updates. It's supposed to be a little bit more social and focused on, yeah, so on the social aspects of music, something that Spotify has lacked historically. But again, that's just something to watch. closely for me and I haven't really seen that many, you know, that many updates to it or or any incremental evidence that they've started gaining a lot of share or gaining traction in important markets, et cetera. So yeah, and I'd echo that. I mean, I would agree with all that. I would agree with everything you said. I would also point out that one of the things I focus, I look at or think

about if there was something that kind of kept me up at night, it would be just this general leakage of audio and the internet, and not necessarily all going just to Spotify or any of these big tech people. I think there's some things that, you know, as audio becomes more and more a part of the internet in general, of things you watch as audio gets integrated more into your daily life and things that you see on the internet. I mean, Daniel Eck talked about this concept in a recent interview at the Patrick O'Shaughnessy's five-year anniversary a few days ago. But I think he's right that something I've thought about too is that maybe the bigger

threat is that they just can't grow like they think they can. And so although it may be a superior product and service leaps and bounds and quality ahead of some of the others, there could just be some natural leakage just in audio and the Internet in general. And there's so much attention, there's only so much time in a day. And it's really competition for your attention and then the ability to monetize that. So as we, as audio becomes more prevalent on the Internet, including the spoken word versus video, that is a form of competition, which people may not be thinking about, but it's on my mind as well. But I guess speaking just to the to the big

tech companies, I mean, when I play with the app, of course, I'm biased, but the way I use Spotify for research and podcasts and the way, you know, we use it at home for for baby music and discovery and stories and listening to interviews with actors or movies that are coming out. I mean, if you think about the way we use it as a family, not just to stream like some, you know, some, you know, curated music list. I just don't see a lot of competition there. I think it's just there's a big gap between what I see as far as quality. It's like comparing an entry level car with, you know, a supercar. So, but maybe the threat comes from just the sheer.

competition of just more and more things, more and more music and, you know, audio going online and permeating throughout everything we do. Maybe it's Peloton and it's a combination of Peloton and TikTok and YouTube and whoever else that's out there, small services in different countries. There's decentralized stuff that's popping up. I mean, it doesn't have the same, it doesn't have the same ease of use. But I think you're going to, as time goes on, there's going to be more and more ways. The ways we consume audio online are the potential, the different ways that you can consume audio online is going to grow exponentially. You mentioned the word bias and maybe it's time for disclosure. We are all,

Meanwhile, all three invested in Spotify, so we are all a bit biased. But coming back to the questions, what are three words that come to your mind when I would say the phrase or the idea of the culture of Spotify? How would you describe it with three words? Hey, Tillman here. I'm sure you're curious about the answer to this question. But this answer is exclusive to the members of my community Good Investing Plus. Good Investing Plus is a place where we help each other to get better as investors day by day. If you are an ambitious, long-term-oriented investor that likes to share, please apply for Good Investing Plus.

Just go to good minusinvesting.net slash plus. You can also find this link into show notes. I'm waiting for your application. And without further ado, let's go back to the conversation. What is the management and are Daniel Eck adding to the company? Daniel X seems to be somebody that is very inspirational, somebody that keeps everybody on track and who keeps everybody focused and has a vision. And that vision is to have all audio available on Spotify.

So keeping people innovating and focus. on that single purpose because it's and again these are just listening to interviews with different people in the company if you can maintain that goal if you get in a perfect world of course you're not going to have every single piece of audio on Spotify but having that is the goal allows you to set allows the creation of or the the it allows for a lot of creative freedom to figure out what does it take and where the incentives to get big pieces of audio that are not on Spotify to Spotify. An example of that was the soap or the Spotify open access platform. So, and we talked about that on the last podcast, but that's an example of a team

sitting around thinking, okay, we have to find a way to get IHeart content, for example, a big podcast competitor on to Spotify. And how do we do that in a way where there's a win for everybody? And that's a very different approach, I think, than some of the competitors who are not as focused on this or do not necessarily have, they have more of a winner-take-most mindset versus what do we have to do to get everybody on the platform. And then how much value does that add to our subscribers and to the creators by having everybody on the platform, we'll figure that out later, how to monitor the best ways to monetize

that. But this vision and this drive to stay focused on the goal, even when the goal, you know, the goal is sort of, sort of, it seems sort of simple, but it's actually a very, very difficult goal. And I think he's done a great job of keeping people focused on that. So that would be my, my takeaway than I like. Yeah. In my mind, I mean,

I think he's an incredible CEO and more recently has started to be noticed by more and more people as, you know, his track record grows, et cetera.

And I think it will keep, he will keep on becoming more and more public over, over the years. I mean, the visionary part is, is obvious, right?

But again, I don't think it can be understated what he's been able to achieve so far and what his long-term, long-term goal is. I mean, he, arguably the company single-handedly bailed out the music industry. Like, that's one way that you could think about it by, you know, having been able to, you know, combat not only the labels and convince them to,

to take on this completely new, unproven business model, but at the same time, you were competing against the product that was completely free. So, I mean, they were battling, you know, all over the place. It was such an incredibly challenging endeavor that they took on. And I think it's been amazing what they've been able to achieve. I heard a very apt description of him, As a CEO, I think it was last week, there was a podcast on the music business. Yeah, the music business worldwide podcast interviewed Troy Carter.

He's a music executive. He was the manager of Lady Gaga for a number of years. He also worked at Spotify for a little bit. And when he was asked about Daniel Eck, he said he's always 10 years ahead of everyone in terms of like the industry and where he's thinking. And I thought that was such a simple but powerful way to think about it. And, you know, most people nowadays are when we look at, you know, most of us are involved in the stock market. And we're very used to thinking about the next quarter, maybe the next year or something. But this is a guy that's truly thinking about where things are going to be in 10 years and spends most of his days thinking about that.

And that's in many ways similar to, you know, the kind of the Jeff Bezos way of thinking, right? And I think that's a super important attribute to have when you're managing a company of this nature. So in terms of his vision, I think that's a good way to explain it. He also seems to me to be an extremely patient individual. And in his own way, he, you know, he has a very firm vision, but at the same time, he, I think he strikes a balance of, you know, having the right flexibility in terms of how to get there, right? I don't think he, he knew exactly how it was going to happen. So you can't really, you can't really trace that path from day one and know exactly how you're going to get there. So you need to have also that flexibility in your mind and sort of change course when you have to. And I think we've seen this already with the change in strategy as they implemented podcasting into their business model in the last couple of years.

And we'll see more and more examples of this going forward. Yeah. And I would just echo that he's not afraid to take really big risk before anyone. They have been the trendsetter. their entrance into podcasting was really a first they went in in a really big way and i think what he saw as far as the future of audio and that pivot away from just being a music streaming company was i think we'll look back someday and and and see that that was just a brilliant move kind of similar to what reed hastings at netflix saw when when they moved away from the cd and went to

streaming and saw a future where all video would be streamed someday. And so that vision of transitioning away just from music to the bigger audio space, it seems maybe, it sounds maybe trivial, but in fact, nobody had done it. And he was a first. And I think you'll continue to see the company make first mover, big, big first mover decisions ahead of everybody else. And then there'll be catch up by the competition. that comes in and it seems to be to me that in the industry in the last 10 years or 15 years

or since Spotify's been around it's always been about Spotify making making a big decision strategic decision and then everybody else trying to catch up and Daniel Leck has said multiple times that Spotify is not for sale that that he wanted to build a company with with Lorenzo I think that this is named the co-founder that yeah Lawrence that that they wouldn't need to sell. And I really admire that mindset. The company was not built to be sold. The company was built as a living organism to grow and to be as absolutely as big and important as it could possibly be. And he's slowly building his own life's work and painting it in the public eye. He doesn't take a salary. He's fully aligned with the common shareholder as the largest

shareholder. And, you know, when you invest in Spotify, you, you are getting Daniel Lek essentially for free. I mean, there's no, you're not paying him a fee. There's no special equity class that he benefits from that the minority shareholders don't. There, you probably won't look up one day and, and have any crazy capital allocation decisions made at their short term oriented, for example, just to pump the quarter or whatever. or so like you would potentially at other companies. And you also don't see him taking shortcuts like you do at a lot of other big tech. There's several big tech companies that I've noticed taking really big shortcuts

that have built products and services really more for the advertiser and not for the consumer. And so the short-term mindset leads to problems down the way. So this idea more that, you know, giving more than you're taking and building something, to, you know, to stand the test of time for as long as possible is, you know, that's the kind of company I want to be invested in because I can be fully aligned with some of the, you know, some of the best people and one of the best CEOs and entrepreneurs in the world. Danny Alec is a friend with Mark Zuckerberg that was disclosed in one of the podcasts of Patrick.

And, you know, from Facebook, they have the strategy if they see something interesting coming up somewhere in the world and new trends, they buy it or build something and use the leverage they have with their users on the platform to fight against competition. Do you see something like this adaptability or just acting also at Spotify that they're, then they see something that's taking off. They also copy it or try to buy it. Yeah, absolutely. I mean, the acquisitions they've made just in the last 12 months have been not only incredibly strategic and valuable, I think, but they've been done on a value basis. And for, you know, these are relatively small companies. I mean, just the acquisition of the green room. I mean, I guess technically they could

have gone out and tried to buy clubhouse for many billions of dollars, but instead they found the green room, which is incredible and did a deal with them that was small enough to, where it doesn't have to be disclosed. If that tells you something, probably I heard something around 50 million plus an earn out, but who knows, the acquisition of pods. I mean, probably we're going to look back at the acquisition of pods and think that was probably one of the most important acquisitions that they've made. And that was also done on at a point where, you know, for an amount of money small enough

that it didn't have to be disclosed. So we're not talking about, we're talking about capital allocation. discipline, looking at everything they've bought, Anchor, you know, all the big podcast stuff, including the investments in the Joe Rogan experience and the exclusive content is just, it seems to be a real strong focus on payback and, you know, maximizing what they buy and not spending as much as maybe some of the bigger companies like a Facebook, for example, in order to get up, to deliver something really important as far as a strategic fit for the company's next step up. Yeah, I've been pretty impressed with their capital allocation strategies and track record, the more I've been following the company.

I think it's very clear for them when it makes sense to buy something versus to build it. a lot of it comes down to how time sensitive it is to make a move on something. So could they have built green room on their own? I mean, yeah, probably. They could have done that maybe in six to 12 months. But instead, they decided to buy locker room. And in less than three months, they had rebranded the entire product and relaunched it. So, you know, live audio had come, you know, become viral in many ways.

at a very quick pace. I mean, Clubhouse, everybody started hearing about Clubhouse in February, so it wasn't really that long ago. And Spotify moved promptly, you know, in a matter of a month or two after everyone was talking about Clubhouse. So I think that was, that was a right strategy. And as Jeremy said, we've seen various examples of that in, in different parts of the value chain, not only on the podcasting side and live audio, but also on the music side. And I think we'll keep on seeing more and more of that. Yeah.

In the past, they've talked about free cash flow. They've talked about the number of days of free cash flow used to pay for something. I mean, I think they're very, they realize, too, that it seems to be that they realize that they want to buy things that enhance the broader vision and enhance their bigger strategy. And so by default, that means they're not necessarily buying an entrance into, they're not using one company to completely enter something new, but more buying companies that just enhance the existing value proposition of what they already have. So it would have been a mistake, for example, to buy Clubhouse,

because they didn't necessarily need to buy that user base. They just needed the basic technology of live streaming to plug into their existing user base and their existing podcast ecosystem. So from that perspective, just the technology itself was the driver more so than the brand because locker room was rebranded in. I mean, locker room originally was Betty Labs and something, but it was rebranded to Green Room. So it was really the technology, which meant that they could pay a much lower price

because it was much less developed as a business and more developed on the tech side. And I think you see that with pods too, which again, I've talked about it before, but I think we'll look back at one of the most brilliant acquisitions that they've made. Pods had, it seemed like a very developed, very developed tech that was much further ahead of anyone else, of the competition and the quest to kind of figure out how to monetize the spoken word and socialize the spoken word. But the tech was built up, but the business itself really wasn't. So it was a perfect match. And I would assume that the sellers, you know, because they're staying on and they're helping to be a part of a much bigger repositioning, Spotify, and being a part

of that future, that they have an earn out that allows them to feel like they're made whole and not regret selling the company too early because of the importance of that tech and the distance that that tech can go within Spotify versus as a standalone business. It's a different capital allocation strategy than buying massive companies for tens of billions. Yeah. So it's definitely been shifting to Spotify's favor if we think five years ago versus today. And I think the trend still holds if we look out on the next five years. So back in 2016, the labels had a lot of the or most of the power when it came to negotiating these very complex deals. The payouts were much higher, so the Spotify's gross margins were much lower than they are today. Before the IPO, I think it was in early 2018, they were able to negotiate higher payouts right before going public. The next step in the sort of in the evolution of this relationship,

which as it stands today, I think it's very symbiotic. So, you know, they basically need each other and they're not going to do anything to hurt each other. But that doesn't mean that the negotiations are easy, though. They're still very, very tough and complex. But I think what they're, what Spotify will be able to do over, over the next few years is to start bringing some of the, some of the label expenses over to their, to their income statement, basically. And we've already seen some of this with the two-sided marketplace strategy where the labels will be spending some marketing dollars on Spotify, basically, at very high gross margins.

And we can see this develop in different ways and eventually even start monetizing some of the data that Spotify is providing the labels. So not necessarily directly changing the percentage of payouts that they're giving. giving out to these right holders, but find more creative ways that can, you know, sort of grow the pie for everyone and everyone's going to benefit from it. The only other, the other option that comes to mind there as well is price increases, where Spotify can find ways to get a little a little better sort of payout structure for every incremental dollar that they're that they're able to to increase prices on yeah and it's i i think it's there's been this mindset in the market

that it's this tug of war and this fight over a finite to a very finite dollar amount of you know a very finite margin that they're fighting over and i don't think that's true i think that there's a what's what's going to happen in five years is the the spotify's margins will definitely go up and and the the relationship with the labels will absolutely favor Spotify more and more as time goes on but the labels have their own really unique opportunities to grow and they also have their own margin expansion opportunities as well so um i like to think of it as the you know the industry is just so small. The addressable market, and it's the way we've thought about music in the past is really limited the addressable market. And as we go forward, the addressable market will just

expand. I mean, I think the opportunity of the addressable market is really the bigger story. And there's, there's room for everybody to make a lot more money. You know, the way that labels conduct themselves and grow an emerging artist or even an established artist are changing really rapidly and they're depending more and more on digital marketplaces and digital tools. You know, the kind of person that would have been successful at a record label or would have been hired at a record label 20 years ago is probably very different than the person that they would hire today. I mean, the job to be done today to use Daniel X terminology is record label is probably

maximizing the brand value of an artist on different digital formats and engaging. finding new businesses and new ways to engage with the fan base. First of all, identifying the super fan base all over the world and then finding ways to engage with them beyond just selling them advertising or selling concert tickets. And you don't do that through, you know, that's not necessarily something, the skill set required to do that is very different. And so there's a lot of changes happening that do favor the larger platforms

or digital kind of a digital mindset in general. But that doesn't mean that the labels lose and Spotify wins. I think they all kind of win. And, yeah, to Sleepwell's point, the balance of power, though, is feels like it's shifting much more to the benefit of the digital platform, which is where the new sources of revenue are going to come from, and where new business models are being built on top of the data, that platforms like Spotify are able to generate.

Do you have any rough estimate about the TAM growth? What is the TAM now at a total abrasive market? Well, the TAM now, I mean, recorded music is something like $31, $32 billion a year, and there's some debate on that number. From what I've read, a lot of times numbers are counted twice, and there's overlap, but the actual number is somewhere around $31 billion. and recorded music and podcast advertising revenue is less than a billion, which is kind of crazy to think about.

So the old way of that music was brought, you know, it was through the traditional way that music was brought to consumers has completely changed. It was controlled by a handful of people and the opportunity just for a musician or for a creator, whether it's a podcast host or an audio book owner or even maybe a medium that we don't necessarily have as mainstream today, to make money by maximizing the brand value of the artist is what is not in the addressable market today. So the addressable market today is essentially just streaming revenue and maybe on the other side concerts and maybe a little bit of merchandise or something.

And that's, it's really, when you think about what does a, what does a, what is the value of a superfan, I don't know if you've ever really fallen in love with, with a band or had a song really move you and get you through hard times or, or have a memory or really important life moment, you know, anchored on a song or a group, you don't have to go further than in high school to see certain kids, you know, what, what music does. certain groups, it determines the way you dress, the way you think. It's friends you hang out with. And as you get older, it also, it also, you know, has more value just beyond a background, you know, background music in a grocery store or something. So you think about what does a country concert mean for the two hours you're at a country concert? It's Americana, it's tailgating, it's barbecue, it's all those things. What does a YouTube concert feel like for the two hours? It's the rush of the experience, but it's also what does it stand? for and what else could Bono and you two sell to their super fans beyond just a concert every

two or three years? And I think we're just now starting to explore what that means, whether it's individual experiences with the band or just the feeling of what it means to be a part of that tribe, whatever that represents. You know, you think about the advertisement that Bruce Springsteen did or the Super Bowl for Jeep and, you know, the Bruce Springsteen kind of person, the way he dresses, the car, the Jeep he drives. It's a lifestyle. It's a way of thinking. It's the genre.

It's the topics that he sings about, for example. To think that all the only value in Bruce Springsteen or Bruce Springsteen's value is just limited to how many concerts he can sing or the number of streams he can get on, platforms is kind of ridiculous. I mean, it feels like we're just scratching the surface and what's possible once, you know, between what's possible between a creator and the super fan. So I don't know. I don't know what the answer is, but it's definitely bigger than 31 billion.

It reminds me a bit of a scene I saw from the documentary about Rammstein and their global success and they went to Mexico for a concert. were the first time there and they then discovered outside of the concert there's the whole ecosystem by the sale ramsstein products with every different fees you have bottle openers keys whatever with rammstein logo and they didn't even know about it so transform this in a digital word and it daniel like has talked about before you know spotify is essentially a um uh is morphing into just a tool set for a creator to identify a way that they want to make money. So some creators, maybe it's, you know, give everything away for free and or just sell

concert tickets for other creators. It's selling something really exclusive. So it's just the first step is to identify your, your fan base. And that fan base is constantly evolving over time. It's not a stagnant thing. It's constantly in motion and moving and evolving and identifying who those people are and and their tolerance for, you know, what they're actually worth to, to their artist and building that interaction and that feedback between the two, whether it's a podcast host,

whether it's unlocking data and information that's discussed in a podcast to unlocking the brand value of a startup, you know, young rapper coming out of, you know, the ghetto, some ghetto and, you know, a poor, a poor country in Latin America, for example, and, and connecting with with an audience maybe in, and, you know, in Norway. I don't know. So there's, there's just a lot to that can, that can be done. I mean, it's, it feels a lot like the early days of the internet. It's, it's, it's one of the industries that has not really evolved financially, um, with, with the internet, kind of like, like other industries have. So when you talk about the Tam, I just think it's unfortunately something that is, you have to corral into thinking about,

Spotify's opportunity to sell premium subscriptions and advertising and in podcasts and stuff like that and and that opportunity is probably tens of billions more than it is today a longer term but as far as the entire industry is concerned I mean just just think about the value of putting more music finding ways to put more music and and on the internet alone and spoken word on the internet alone is just got to be it's just got to be enormous and and to take a step at it would have been like taking a stab at what is streaming video worth, you know, 20 years ago, people or 15 years ago, people thought that Netflix didn't have any value and would be forced to sell to a bigger competitor or to a big movie studio because the consensus was that the video

streaming addressable market was maybe one billion. And fast forward today. And we still don't know what the addressable market is for online streaming for video. streaming. I mean, it's just going to continue to grow and grow, but we know it's definitely a lot bigger than one billion. So it's an incredible runway to invest in. I think about it in different ways. And any way you look at it points to just how undermonetized the market is and how large the opportunity is. I think we can go anywhere from four, maybe even five times. big as we are today in 10 years time, right? If you think about streaming penetration right now,

you have around 440 million paying subscribers globally. There's roughly call it 4 billion smartphones, which is consistently growing at a rate of maybe 6 to 7%. So naturally you get a tailwind from that as well. But just by getting higher penetration from streaming, as a, on a global basis, which I think is a natural thing to happen in the next couple of years as we've proven how much of a superior value this product is for every consumer out there.

And then on the other hand, you have the monetization side, which can also improve. So when you combine those and put those two together, it's not hard to see how this market can quadruple in the next in the next 40 in the next 10 years sorry well and and to your point sleep well it's you know by our calculations there's something like 4.3 to 4.4 billion people between the ages of 15 and 64 who are potential you know that's kind of a potential demographic to be a pream subscriber in the world ex china so just excluding china because China has its own you know they have they have 10 cent music and they have their own regulations and rules. And so just for getting China, the rest of world, X-China is about,

about, you know, let's call it a similar number to what you were just talking about with smartphone. So let's call it maybe even, you know, 4.3, 4.2 billion people. And Spotify, you know, in a lot of markets may have, you know, 20% of that, but it's still very, very underpenetrated. So globally, I think, you know, at 165 million paying premium subscribers, maybe they have, you know, our calculation, you know, less than 4%. They penetrate something like 3.5 to 3.8% of the market. And on including the premium subscribers, you're still at like 8. something, 8.5% of 15 to 64-year-olds ex-China. which is pretty incredible.

And just looking at the U.S. numbers, and again, it's hard to think about Spotify being by far the market leader, and it's still yet such a small company in terms of percentage of market share compared to radio. But in countries, you know, in places like Europe, where Spotify is a Swedish company, and I'd say, you know, Europe is probably more saturated or more evolved in terms of streaming than other places. But Spotify still only has like a little over 20% penetration with 66 million premium subscribers, which is about the population of France. So there's just no matter how you look at it, whether it's Africa of a billion plus people between 15 and 64, whether it's the rest of Asia, whether it's Latin America, you know, with 400 and something million people between the ages of 15 and 64, there's just.

an enormous opportunity, whether it's just, whether it's freemium or premium, and we're just scratching the surface. In your eyes, what are the top five drove drivers for Spotify? Like the five forces that can bring the growth? Sleepwell and I had a great talk yesterday, and he had a really interesting way of framing the flywheel. So I might want to, maybe that's something to talk about. Yeah, I think it makes sense, especially given there's been a subtle shift in their management's narrative and way of explaining the company where we've seen a more recent focus on the creator side.

It used to be a lot more focused on the user experience, but I think now there's more of a balance between being able to help out creators and what. work towards their goal of eventually achieving, you know, one million creators being able to live off of their craft and at the same time serving a billion users. And I think these two sort of supply and demand components really feed off each other a lot because if you give creators the best tools to monetize and connect. with all of their fans and, you know, offer them the best, the best platform to, you know, to exemplify and show off their work, it's naturally going to bring a lot, a lot more, more users to the platform. And at the same time, you know, you get the classic flywheel effect that the more

users you bring, the more likely creators are going to be attracted to your platform. So I think it makes a lot of sense for Spotify to pursue the strategy of attacking both sides of this supply and demand curve. And that's going to be a very, a very big driver of their growth going forward. So if we translate that to, you know, sort of more KPI metrics, obviously we're looking at MAUs and both MAUs and premium subscribers, but then you also have to pay attention to what management is saying in terms of how many creators they have in the in the platform i think the recent the most recent number we heard was somewhere in the six million figure if you count this obviously includes artists and and podcasters we've heard management say they can they can

probably double this this number in the next couple years and eventually reach a figure as as high as 50 million creators, which I think is, is incredible, right? So these two, these two, I think, are the are the most important metrics to, to, you know, to keep a close eye on as we, as we go forward and, and the, you know, the strategy, the strategy develops. The other one that comes to mind for me that's super important is, is engagement, right? And there's different ways to to think about this and sort of understand how much of the listening share is coming from podcasts and if that's increasing overall music consumption as well and increasing the overall time spent on the on the platform and also comparing how much time is being spent

on Spotify versus versus the competition so those are those are some of the big ones that I'd like to focus on. Yeah, and I think just to chime in on that, it's the flywheel of, you know, the engagement is key. So the more time, the whatever Spotify can do to increase the engagement is probably the most important investment they can make. So the engagement drives, so the model is, most people start, they come in as a free user, premium, and then they convert to premium over time. So the more somebody's engaged, more subscribers engaged with the service, the higher likelihood

that they will convert to a premium subscriber. And so the business model is around increasing that engagement. So it's not good enough. For example, to, you know, I think, and Sleep will tell me if I'm wrong, on this, but I think that the average engagement, something like 25 or 30 hours a month. And so their goal is to maybe, yeah, and probably a lot higher now. Last we heard, yes, but I think that might be higher now with podcast. This is this figure, this figure was like from me three years ago or something.

Okay, okay. So let's say it's, I don't know, 30% higher than that. Yeah. Yeah. And so the more they can do to increase engagement. So let's say, you know, by focusing on that. artist and building value for the artist, by default, it builds value for the subscriber and it encourages the subscriber to engage more, which increases the chance that they'll flip to the

premium service, which also over time increases the chance that they can, they'll pay more for that premium subscription. So if you think about Netflix, where they were, you know, there was a point in the past where, you know, the number, the selection wasn't that great, you know, going back 10 years or eight years. But today, the selection is so great and it's become such an integral part of people's video streaming life that it's easier. The engagement is so high, it's easier for Netflix to raise prices. And I think you'll see that with Spotify as the engagement increases because you have access to, you know, some events or some more engagement with, you know, with artists. Let's say you get an invitation to do a behind the scenes,

or pre-album engagement with an artist before the, before the, you know, before the concert or you get to Patrick O'Shaughnessy says, hey, you can, you know, to my top fans get to ask, you know, one-on-one questions with the, with the person I'm going to interview right after the show. You know, things like that are going to cause you to engage more. And, and I think one of the, one of the, they're just working on so many different ways of focusing on that, that engagement and increasing that engagement. One of the things they talk about is, you know, becoming the audio browser, and the audio browser, for example, in podcast could be, you know, it could be really valuable to be able to do more and more research and search things out through podcasts. And so I can see a future where you just can't live without the way you can, but a future where it becomes normal for most people to have a subscription to Spotify, a paid subscription to Spotify, just like you think of Netflix today. relatively normal for most people in the develop world, at least, to have a subscription to Netflix. And they're going about that through doing whatever they can to increase engagement and providing much more value than they're asking you to pay. Maybe let's walk a bit through the puzzle pieces they are building to increase engagement. And one big puzzle piece is the widening of the market with the offer of the service.

service to emerging markets. They released at the last capital markets. How they are going about emerging markets, Spotify? They launched in 85 markets this year, right? Yeah, I mean, just first off, when it comes to these markets versus launching in, you know, markets where they actually had a very big head start. Like Latin America is known to have been a massive success because they were pretty early on on the process and the brand was already very well known in the region. So they're very much the undisputed leader in the entire region. But these newer markets mostly were in countries like in Southeast Asia, Africa, the Middle East, a handful of other countries in other regions.

but basically most of them were centered in these regions. I think it, I mean, it's not a surprise because we know that they're going after basically the entire world excluding China. And, you know, we know that from the most recent quarter results weren't as, you know, they weren't as impressive as maybe some people would have expected. them to be. But I think there's there's a couple things to keep in mind when it comes to these, to these newer, more sort of developing countries. The first one is that a lot of them are very much dominated by piracy, right? So it's, you're working towards competing with a completely free product, right? And sort of educating the consumers about this, this superior product that you can also have for free and eventually it would make sense to pay. Obviously, you have to offer it

at a much lower price point compared to any other market that has higher incomes. And at the same time, in many of these markets, you're competing with local players that may have been around for maybe three or five years, right? So those already had a head start. And the marketing spend in these in these launches is is very important and something that they actually cut down in the last couple months because of of COVID restrictions that that came back in certain places. So I think it's it's very important to to follow to follow these newer markets and see what the traction is is like. I think it will take time. I don't expect them to to you know to get millions and millions of new MAUs and subscribers overnight.

But it's definitely the right strategy. And I also think they had to move fast because, again, you already had some competition with local presence. YouTube is another big player in many of these countries that's been around for a long time. So time was definitely of the essence. And they had to move fast in that sense. yeah and and um yeah the the monetization of i just keep coming back to something it's just a really basic fact is that as of last quarter the company was earning something like 50 cents

u.s. cents per subscriber in gross profit so it's the opportunity is is there um that that that that gross profit per total subscriber has continued to grow as Kagerd in the mid-20s for the last five years. But there will be a point where that grows. I think it has the potential to grow just exponentially. And a lot of it has to do with them figuring out how to most effectively open up these markets that they're just now getting into. So if you think about some of the less obvious opportunities, you know, and develop

developing countries. So let's say they opened in Tunisia. One of the markets they talked about was Tunisia that they opened in. What is the opportunity in Tunisia? Do you think that everybody is going to start paying $10, $15 a month for a subscription in Tunisia? Probably not. But if you think about the opportunity for the artist, for artists that didn't have an opportunity before, that didn't have an audience before, there is a natural pull through where a local artist now feels like that they can be heard, that they can upload their music through like a digital label, like Believe, for example, and build a fan base. And that has two things.

First of all, that helps create engagement and with the existing Spotify user base, that might be interested in that music. And secondly, it drives new users in that country and for that type of that music as well. So if you discover a new musician in Tunisia, for example, and that guy says, hey, or that girl says, hey, you know, I'm on Spotify. There's a higher probability that that word will spread

and that the audience or the fans of that artist will at least listen to the freemium model in Spotify to listen to that artist. And as the tools get built out, which are really there to either compensate that artist in different ways or book a concert or sell merchandise or support them in a certain way, as those tools become more and more prevalent with the combination of, I think, maybe a blockchain solution and payments that maybe we'll talk about later through the DM Association. and you start to open up a way or different paths to monetize those markets in a way that I think the market's not necessarily thinking about that will be a little bit different from just the obvious you know just increasing you know expecting that everybody's going to have a premium

subscription now it's time for a break as our episode on Spotify was really long we decided to split it into two episodes. We will find more on Spotify in an upcoming podcast on this channel. So please subscribe. Thank you. As in every video, also here is the disclaimer. You can find a link to the disclaimer below in the show notes. The disclaimer says, always do your own work. What we're doing here is no recommendation and no advice.

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