Good Investing Talks - How does Spotify win the creators, Jeremy Deal & Sleepwell Capital?

Episode Date: October 27, 2021

Jeremy Deal and Sleepwell Capital discuss in the final episode of our podcast series on Spotify how the company wins the creators.

Welcome back to our talk on Spotify. This episode is the final episode of a three-part series. So if you want to understand the full story we are discussing here, please go back to episode one or episode two to watch it and hear it. But if you already consumed these two episodes, feel free to watch the third episode now. Enjoy! For the growth, I've observed it is that Spotify is using a lot of partners.

You think about the embed of the Spotify player from using Facebook. You think about the possibility to go on your PayPal account and don't get an advertisement for YouTube premium, but get an advertisement for free month, Spotify premium for free. Like what other partner is Spotify using and how clever do you think the strategy is? Well, the telcos actually are incredibly important, especially in emerging markets, because as Jeremy mentioned, the payment side is an obstacle many times in these countries where a lot of, you know, most of the population sometimes is not even banked and has sort of alternative means to be able to pay for internet services like this.

So, you know, their cell phone company many times is one of those few, you know, kind of utilities that they're, that they're paying for. So it makes sense for Spotify to partner with these companies and be able to offer Spotify in either such, either a bundle or an add-on to their services, et cetera. So that's that's one partnership that I think is is very important for them. Yeah. And just to add that to that, thinking about how do you pay royalty to, I don't know, just pick a, let's say there's a 16-year-old emerging artist in a rural part of Bolivia, and somehow she recorded an amazing five or six songs, and somehow they're uploaded to Spotify. How do you track that?

I mean, how does she get paid? I mean, you think a traditional, in a traditional sense, you would have a bank account and you have a routing number and whatever, but it's it's not so simple and and a lot of parts of the world. So it's it's it's the payment side is a really is not only a big hurdle, but it's also an enormous opportunity in emerging markets. Um, because it's not just about Spotify receiving payment for local people for the premium service. It's, it's really about like, how do you pay the artist and how do you encourage more artists to get on and, and, and, and create, whether it's podcast or whatever, audio books. Um,

in a way and how do you encourage them to get on and produce something and then how do you pay them and then how do you you know for example if you do identify Spotify does identify a super fan of the 16 year old Bolivian you know in a rural part of Bolivia that I just gave as an example how does how does she receive you know whatever whatever is being you know whatever she wants to sell to the super fan whether it's another experience or whether it's a concert or How is that sold? So there's a lot of opportunity, but there's also a lot of hurdles when we think about emerging markets. And Spotify seems to be really well, really focused on unlocking that opportunity, thus the focus on expanding.

And I think now they're in 180 something, some odd countries of which 85 countries came this year. But it wasn't just it would kind of not, it wouldn't have as much. I guess the point is it wouldn't have as much value if it was just about simply launching and just hoping people turned on a premium subscription at some future date because I think it's a part of a much bigger strategy to unlock value and addressable market in those areas. Yeah, and similar, no, I was just going to say because it's pretty much in line with this idea of finding the right partners is also their ubiquity strategy, right? Being able to offer the service in, you know, potentially every device that can play music, right?

And I think they've proven to be very apt at that and have partnered with, you know, most of the relevant places where you can, where you can listen to music digitally. so another thing that's more developed markets and maybe it has also a bit of a boomer cringe attachment is the car thing they've just launched and i don't know if you see it in twitter feed too currently they are making a lot of advertisement for listening to spotty thigh in the car and want to push this topic what are they doing around the car and to widen the audience there with the cuffing. I saw the car thing in New York.

My brother has it. Oh, really? He's got a, yeah, he's got a 10-year-old, 10-year-old Honda, which is, I think he's the target audience that they were, seemed to be going after. It seems to be an experiment, the way they talk about it, to understand how people use Spotify in the car more so than, and then I think from there, though, figure out what they want to do is they've made it clear they don't want to be a hardware company in any way, but there is an enormous gap with people that drive a five or 10-year-old car.

I mean, there's just not, the stereo just can't connect to your phone and you can't stream Spotify of the car. So I applaud and commend Daniel Eck for taking the plunge of sending out the car thing to a random test group of people to see kind of what happens. And maybe that's what it takes. But the car is an enormous opportunity. And I think we talked about this last time that the OEM, a lot of time, I mean, unless you have a new car, it's hard to stream. And even if you have a new car, a lot of the radio stereo systems in a new car, it's like a multi-step process to connect your phone to the car every time you get in. If somebody else wants to connect their phone, it's a two, three-step process. You have to put the car in park.

You have to press this button. You have to pair it. And it's just enough of a pain in the ass where it's a pain in the ass. And a lot of times, if you're just jumping in the car real quick, you might just hit the radio button and listen to the radio. So I think car thing is Spotify is, again, a very entrepreneurial approach to kind of understanding what the job to be done is in the future of trying to be, trying to crack that code of having Spotify potentially built in to, you know, to new cars

in the audio system like it is in Tesla. Tesla's. So you win this audience by the different initiatives. And the next point is to make it sticky and keep people coming back to Spotify. One thing I personally found superior is the discovery and recommendation at Spotify. How would you guys rate it compared to other services? I think it's great. And clearly from the data, it's much superior to any other offering that the competitors have.

I mean, just the fact that not only on the engagement front, where Spotify has an advantage of two to three times versus competitors, but the time that is spent on these algorithmic and editorial playlists is pretty high. It's over, last we heard, it was something over one-third of the time. This is probably higher nowadays. And I think Spotify to consumers is very much known for how well their recommendations are in the music side. And I think we're going to see something similar on the podcasting side as well. We know management is very focused on that.

And this is also, it's not only the innovations that they've been able to, you know, to achieve in the past 10 years of investing in product, engineering, R&D, etc. As I said before, it's very much an engineering-led culture at the company. but it was also the result of some interesting acquisitions. Jeremy was talking about pods being an important one in the next few years for podcasting. There was also a very similar acquisition that took place a couple of years ago on the music side called the Echo Nest, which basically was the backbone for Discover Weekly. So I think they've been, again, pretty savvy in buying some of the best technology that's out there.

And Discover Weekly was the, yeah. So Discover Weekly was really the first algorithmic playlist and everything else was kind of built on top of that. And there's all sorts of different recommendations that go out nowadays. And for me, it's probably the biggest key differentiator when it comes to the engagement driver in Spotify. And data is another advantage that they have because of the size of the user base and how global it is. They're more likely to find someone that has exactly your music taste, which another platform that's more sub-scale would probably have a harder time doing, right? Yeah, and the fact that these big playlists are different for everybody is something I think people don't grasp. So all three of us can go to our Spotify apps right.

now and go to the same, I don't know, wrap caviar, for example, and we're going to see three different sets of, now there could be some overlap, but we're going to see different things. And I think that's super, that's just fascinating. If you think about mathematically, the combination of options as the subscriber base grows, it's just astounding. And it opens up the, it just, it just creates, it just creates optionality. that just didn't exist in the past. And the recommendation engine is important because it can identify.

It just improves every day. You think about how superior the Google search engine is compared to anything else that's ever existed. And part of the reason is because it compounds on itself. As people use it, it just gets better and better and better. And I think not that not to, I don't think you can compare the Spotify. recommendation engine to the Google search engine yet. But it has a similar characteristic in so far as it's compounding on itself. So the more users, the more people use it, the bigger

the list, the more people upload, the more do it yourself, the more songs that are uploaded on a daily basis, the more podcasts, the more creators, all of it just compounds exponentially. And we're never going to be able to look at a specific KPI because this is within, you know, Spotify's Secret Sauce, you're never going to be able to probably quantify that exponential growth like you can't really see that within Google. You just know that it's an element of the business that that becomes the second engine that just grows probably, you know, obviously much, much faster than, yeah, it just increases their mode and grows a lot faster than revenue. And it's the biggest switching cost, I think, for many of these consumers.

It's the first thing you'll notice if you go to Amazon music or Apple Music, you're like, this thing knows absolutely nothing about me. And we all can also have personal, right? Absolutely. Same with podcasts. And so the more content that goes, that it just kind of goes digital, the more important this is. And it's actually more obvious in podcasts, how big the opportunity is because Spotify being, I don't know, number two in podcasts and probably going to become number. number one, as far as the number of podcasts, I mean, they had almost no podcasts a couple of years ago, and now it's, you know, two and a half or almost three, two, but it's going to go probably

well over three million in the next, you know, several months, six months or whatnot. And as that content grows, think about the number of words in a podcast. And the content, as that content grows, the, the value becomes in the recommendation engines and the, and the artificial intelligence required to sift through that and make sense of all of it. And, and, and, and, and, summarize everything and create searchable content that has value to people. And that is a really big key differentiator between Spotify and any other service. Because other companies may also have maybe working on a similar problem. And they may also be, you know, have recommendation lists.

I mean, when you sign up for YouTube music, it asks you do you like, you know, actually you have to click on the titles of different artists and it sort of tries to understand what you like. But that's different than having, you know, many, many, many years of history. What was really important is the algorithm that's kind of monitoring as the engagement goes up, there's more information for them to monitor and the recommendation engine just gets better and better and better. And it's just this virtual cycle that, you know, I think that is really underappreciated.

A question on the recommendation engine in music, if you confirm what I've heard. Spotify seems to have, is not doing like person X here that. So I recommend you the song, but instead they went through the songs and distilled them to the atoms and look for patterns that are similar with the recommendation they do. Can you confirm this? They are also better on the technical side and the way they do the music discovery. There's different strategies. that they use. It's not only a single one. There's definitely been, you know, some, I guess you can call it analytics on, on, you know, like analyzing the songs to the, to their specific waves and, you know, sort of categorizing them to, to how they sound. And not only on a genre basis, because genre is one way to categorize, but you can, you can, you can have sort of moods of a specific song, song as well. be done with machine learning and things like that. But they definitely leverage the taste of other users. And one of the ways that they do this that we've heard from before is by looking at

your own playlists that you've built and comparing those playlists to what other users may have done that is strikingly similar to what you have. So chances are your taste is going to be pretty close to that person. And if you replicate that millions and millions of times, which they can because of their massive scale, you have a much higher chance of being able to hit exactly the right song that you want to be listening to or be adding to a specific playlist, et cetera. So it's a combination of different, you know, sort of data analytics and data science that they can apply to this. and it's also shaping the way a song is created today and you know they've songs in the past used to be a lot longer i don't remember the exact numbers but it was something the average song used to be four minutes long

or something and even had some older songs in the 70s or seven eight minutes long and songs today are a lot shorter and there we now have data to be able to create songs. Artists have the, have information to create an engineer songs around certain artists, around certain audiences. And maybe it's not, it doesn't sound as authentic as somebody just creating something in their bedroom. But what we have with tools today are the potential for songs to be created that they have

a higher probability of being very popular and songs that can be created, I think we'll see songs that are created around other business models. So a song that's created in order to sell something specific or in order to induce a certain group of people or encourage a certain group of people to do something specific or be a part of a certain experience. Similar to maybe how a song that you hear in a movie just sometimes it feels like it was it was created for that movie and sometimes it was but other times it wasn't it just happens the lyrics happen to be just a good fit and so as as we as the recommendation engine and the technology improves and we really fully understand the matching of what people are interested in and trends real time and live

that data becomes more and more valuable to all parties. Coming back to the podcast experience, can you maybe shortly describe what pots and the ongoing transcription of existing podcasts on Spotify can add as qualities to the platform? I mean, my, look, the way I research companies has changed over the last year and a half, two years. And one of the first things I do, which I never thought I would do, is I Google the founder. I did Google. I search the founder in Spotify and see if there's an interview. And I start with that.

I don't start by opening up the 10K anymore. I don't start by doing a screen for the balance sheet and valuation. I just am interested in hearing the founder or the CEO talk. And I want to kind of hear he or she and listen to what it is they're trying to do. And then if that sounds interesting, the more financial work, the traditional work investing research begins. And so if you extrapolate that out over how much information is being created in a podcast, I think there's a lot of opportunity to string together important sentences and phrases or key sentences and phrases about a variety of topics that may not even be connected in a particular podcast and string them to. together in a format that allows people to have deep insights about a specific topic. So, for example, in this show, we've covered a lot of things, and there could be a sentence

or two about something maybe not Spotify specific that could be strung together with somebody querying or looking for information about something, I don't know, about something, pick, pick one of the two or the three or the four of the sentences that we've mentioned in the last an hour and a half. Or whatever. And they string that together with maybe thousands of other podcasts and use machine learning to pull out that information and then put it all together with references. And essentially it becomes kind of a search engine, an audio browser like they talk about

or a search engine for audio. And as far as I know, audio is kind of the, there's less audio on the internet than there is visual by a magnitude, by a, you know, by a, I don't know, a big factor. So the way I understand pods is the leading technology that the machine learning technology that pulls out key pieces of the, of a podcast of maybe an hour or two hours long, people are just kind of talking and it pulls out the most important essence of it and allows you to then string together things and produce queries and research in order to, one, promote your podcast and find, exist, you know, really important pieces of it that

they potentially could be used to advertise and promote, you know, some funny sentences that you said to bring people and to listen to it. Or just to just to create research, just to give someone research about a topic. So that's the way I understand it. And there's actually some good podcast with the founder of pods out there and talking about the bigger opportunity and how far advanced they were before Spotify bought them and their goals and mission and just sound like a just an incredible opportunity in general. And let's then, after looking at the audience perspective, move on to the producers and

the creators, how you want to call them. I think two themes I could identify on the creator side is the reduction in friction in the production. Spotify is investing a lot, building tools. Another one is creating income sources for creators. Maybe let's try to take a look at the initiatives they do in reducing the friction in production. There's life experience, green room.

There's anchor. It allows the easier production. What are the meanings of this tools for you, Spotify is building here? And maybe what tool do you want to add? Yeah, I think it's a super important, like, part to focus on when thinking about Spotify and, and the, you know, the strategy for the next few years. As we were, as we were talking about earlier, this shift to, you know, to, you know, to, to bring more focus to the creators recently, not just to the user base, is going to help the platform a lot.

So on the creator side, you obviously have to separate the music side from the podcasting side, right? Because it's a very different form of audio and there's a lot of different intricacies and laws that surround them, et cetera. Maybe I'll talk about music and then and then Jeremy can add some thoughts to the podcasting side. But, you know, I think that they've done a very nice job on helping creators, you know, artists and songwriters make a better living as they would have called it 10 years ago when it was practically impossible to be an independent artist. And they've done this in different ways, right?

Not only by, you know, streaming is, it can now support a decent living if you're in the sort of in the right segment of an artist. If you have thousands of monthly listeners, it's probably not going to do it. But if you're called out on the 200,000 to 200,000 plus listeners, you're starting to generate a decent amount of income from streaming, right? And, you know, there's the value chain is vast and the process for a song to be, you know, from its creation to actually be put out on the platform, takes a lot of logistics. and there's a lot of intermediaries, et cetera. And I think Spotify has tried to sort of have a place in each one of those parts. So, you know, they own a company, for example, that's called Sound Better, which is basically a marketplace to, as an artist, you can find producers, sound engineers,

someone to master your song. Maybe you need a bass player to finish recording a song and things of that nature. So on the production side, they offer some tools, and, you know, on the, on the distribution side is, is actually a place where I think they could, they could do something, something else, right? And that's actually one place where I think Spotify could end up doing an acquisition, because just to kind of take a step back for those that may not be as familiar. with, but there's, when you have sort of a completed, you've completed recording your album and it's ready for, for publishing and distribution, you don't just go into Spotify and upload it straight to Spotify. That's, or either, or Apple Music or anything like that. You have to go to something called a distributor, which will then this put your music out in

every relevant digital service provider and they will take a cut from sort of aggregating all the all the royalties that get paid out to to your songs and then they pay and then they pay those out to you right so it's actually pretty similar to to what an anchor does on the podcasting side um what i think spotify should should eventually do is is buy one of these distributors and not keep their you know not keep those artists exclusive to Spotify in any ways because artists need to have maximum exposure but they can perhaps you know get a get a better rate or better terms for Spotify you know for those songs that are being streamed in Spotify specifically and actually start getting more data for from that's coming from the other all the other

platforms like YouTube, Apple Music, etc. So that's one part where I think they can make a very interesting move on the music side. People have long talked about Spotify signing like superstars and things like that. I don't think that's going to happen anytime soon. But this other idea that I just that I just mentioned, I think it's actually quite plausible. And Apple actually invested in a distributor. I think it was a couple months. ago, United Masters, and a few years back, Spotify made an investment in one as well in DistroKid. So it's not, I mean, it wouldn't really be that surprising if they make a move there. Do you have anything to add, Jeremy? No, I think that covers it. I mean, that's a lot of detail.

And I think it helps that Sleep is also a musician and an artist and has a really ground floor perspective on on what it's like and and the process for publishing music yeah i would just add on the just quickly out on the sorry on the on the on the artist side one thing the other thing that i think that they're already working on but we're we're due to see more improvements is kind of on the spotify for artist platform which is you know the the data analytics tool that you get as a as an artist and I think we're going to be seeing more and more details that are going to be available and sort of ways for artists to connect with their fans and understand exactly who their super fans are

and be able to monetize them better, et cetera. So those are some changes that I think we're going to see in that site. And the same is going to apply to podcasters. Yeah, and again, this is about driving engagement. Because the more opportunity that Spotify can create for the creator, The higher chance that people will engage longer with the app during the day and the higher probability that you'll convert from freemium to premium. And I think there's other smaller flywheels within that where, for example, you know, there's margin opportunity in Spotify for artists and selling data and there's a lot of ways this could go, but a lot of optionality. beyond that. But I think this is, you know, the focus of the company is how do we help artists make

more money? How do we unlock the addressable value, the addressable market of all these small artists? Why is it that an artist has just been limited to streaming revenue and concerts? And how do we break down those barriers? And it's all about kind of encouraging more people to give it a shot and find their fans. And even if it's part-time, it's better than the opportunity is better than it's ever been. And it drives engagement. And it separates Spotify from the competitors.

So it's really exciting. And I'm also very excited about Spotify for artists. Sleepwell and I were talking about it yesterday. How do we think, how do we think of we're both kind of taking a shot and how do we think about this financially as that I? item, a line item maybe in the income statement in the future. And I think he helped me also think about it in terms of more about engagement and maybe it's margin accretive because sometimes there's just lower, these services are

traded for a lower, a lower royalty rate, like in the case of some of the bigger digital music labels like Believe. But yeah, there's other ways they could potentially charge, but the, The more valuable the musician becomes, the better it is for Spotify's engagement and user and ability to kind of move forward their business model. And for the podcasting tools, I also have the point of reducing friction they give. Like, it's easier to produce. You don't have to upload it to WordPress server somewhere.

you're allowing to embed all your snippets, you have a certain right management embedded in it so you could use popular music to play behind your podcast episode. You have advantages on data and tracking. I've compared different data tracking and engagement tracking tools

and Spotify is really good. YouTube is on the same level, but Spotify is really good. And also, they've created posts and surveys, a bit like the YouTube experience where you can also ask your audience about their tastes and their interests. Yeah, yeah, look, and it's the idea is

the more, the more podcasts are created, the more quality podcasts are created, the more value, the, you know, the more value accrues to the aggregator. It's kind of the Ben Thompson talks about this, about the aggregator theory. And I think Spotify should be doing everything they can to lower the barrier to entry and help you make more money as a small podcast host

and help you grow your business because the more, you know, Tillmans there are, the more you need Spotify to kind of sift through the data and, and find and help you find your audience. And the more you need Spotify to, for example, apply the pods machine, you know, algorithm to to to help you market your your podcast and be heard amongst a sea of you know potentially a hundred million podcasts in the next 10 years or five years um and instead of the three or four or five million that there are today and so um you know Spotify kind of creates its own demand for its future um by helping by by lowering the barriers and and letting kind of the opening the floodgates to come in.

It's a very opposite business model of kind of a traditional business, a non-tech business that's trying to put barriers up and and control things and prevent and prevent people from coming in the door that aren't paying the fees. So it's a different model than, example, the old record labels. But it's a very, very powerful. It makes the, it really, enforces the aggregator role that Spotify plays and it enforces the value that they that they create

you know the when there's more the more content there is so it's in there to their advantage the the great thing also about podcasts is that they because it's basically a completely new market and there is no intermediaries that you really have to deal with like you would on the music side with the big labels etc you can test out all these kind of new monetization models and see what works best right so we already know they they've you know advertising has become a very big focus for them and the idea is to not only for Spotify to be able to monetize better on the advertising side but a lot of that will be shared with with the creators who are bringing those ad dollars similar to the to the YouTube model in that sense right so it's going to it's going to be another additional

advantage to the to the platform because creators will tend to spend more time and more focus on the platform that's paying them the most right and then they also announced specific subscriptions for for podcasters so if you want to also have a premium you know a premium show to to kind of segregate your super fans you could you know tillman you could you could you could have bonus episodes in Q&A for people that are paying you, you know, five euros a month or something. And that's something that Spotify also has announced and is going to be rolling out over the next few months. Yeah, and I think it opens the door to create, when people talk about business models being

built on top of what they mean is it just allows you to kind of invent things. And let's say, Tillman, you decided that you had a request for, I don't know, think about a famous, somebody famous, that you. you've interviewed or a really well-known manager, fund manager that you've interviewed, you know, you could figure out that, you know, people would pay some amount of money to have a one-on-one with that person. And you could even tell that person, like, look, I know you're already successful, but if you do this, some percent, your, you're, half of the proceeds will be donated to a charity or to something like a Robin Hood Foundation.

Or there's going to be a stock pitch that you're going to invite, you know, I don't know, your top 100 listeners to users to. I mean, there's just so many things you could start to potentially invent with the tools that you have with knowing who your subscribers, who your users are and that you could leverage a platform for. So it's not a pie in the sky idea, but it sounds pie in the sky because you're just saying, oh, these magical business models, we don't know what they are.

But it's really just saying, look, it's up to you to invent them. And a lot of these have never been done. I mean, the podcast industry, to Sleepwell's point, is so new. But I don't think it's going to take much time before we start to see one successful podcast. You know, somebody creates or have an idea that, hey, we could do this and somebody will copy it. And, you know, entrepreneurs, people are very innovative. And when they see something works, they'll do it. And they'll, and I think people will become more and more creative on how they, on how this, how they move the podcast.

podcast business forward. It won't just be, you know, selling advertising is just one option for them. And I think, you know, Daniel Eck talks about that. Like, look, if you decide, if you decide, or Gustav, actually, he said, if you want to monetize with advertising, great. But if you don't want to monetize with advertising, you don't have to. You can charge a fee. If you want to have a special green room event, you can. If you want to do something completely random that you invent, you can. And that's why I think investors have a hard time with it. it because it's just something that just hasn't happened yet. The interesting thing about Green Room from the creator perspective is also that they enable

recording and not only the live event, you have on Twitter spaces, you have on Clubhouse. You have to be live there. Otherwise, it's gone if you don't record it yourself with some kind of tools. And this is really annoying for creators because you lose the possibility to give it to the bigger audience that can't at the live event. That's also a thing I think they built clever. Maybe let us think about one thing that's often criticized about Spotify, the streaming income. It's more the music side, but many struggles are about it that people can't live from the streams.

How should we think about the streams? Is it more a commodity that enables further transactions or is it more a thing we should think as an income? Look, yeah, Sleepwell knows probably more about this than I do, but yeah, give it a shot and I'll try to follow up. Yeah, I mean, obviously feel free to chime in with any thoughts, but yeah, this is, I know it's a controversial topic, but you have to look at the sort of the heart data and the evidence and where the industry has come from, right? because obviously, you know, 10, 15 years ago, piracy basically killed the entire industry. And now, thanks to streaming,

we're back to a pretty healthy ecosystem that's been growing nicely. As an artist, I think you have to recognize a couple things, right? The first one is that streaming is not and shouldn't be your only income source, right? So there's definitely different places that you have to focus on, not only on the concert side, but, you know, the most successful artists, they don't even have to be the biggest ones. They're the ones that are able to monetize

their super fans at a higher rate. They have a very clear strategy on the merchandising side. They can, they do things like, you know, they can do a clinic with their guitar player that's teaching their fans on how the techniques that they use on the guitar like. These are are things I've seen many artists do and be able to to not only focus on their on their streaming income. And then I think the other important part to recognize is that it's going to sound cruel, but it's just the nature of the of the business is not every artist deserves to make off of a living as an artist. Like it's, there's just too many of them and it's a power law, right? The top of the funnel, it's what's driving the most of the streaming

income. I was actually on Twitter this last week, and I saw a random guy pop in my feed complaining that Spotify paid them, I think it was like, I don't know, $20 or $30 in the past 12 or 18 months from streaming royalties. And when I went in and saw their artist profile, I think he had like less than 100 monthly listeners. And I mean, I just went back and said, you know, as an artist, like, you should, it's going to sound cruel again, but you just don't deserve to be making off a living off of this because there's not, there's not enough people listening to you. And this is the equivalent of you selling three or four albums per year. So that's, that's mainly the people that you're going to hear complaining.

If you have 50,000, 100,000 listeners, which that's actually a pretty decent, you know, a pretty decent artists and independent artists, it's pretty common for them to have something around that. It's pretty likely that you're going to be generating some interesting streaming income, but you're also going to be making, you know, some concerts that are going to be pretty profitable to you. And then at the same time, you can sell merchandise, et cetera. So it's not, it's not only Spotify that's paying, you know, that's paying this out. They're already paying over two-thirds of their revenue as to all their rights holders, right? So it's basically the same for Spotify and Apple and Amazon music. These are how the deals are structured with the record labels

and the distributors. And I think as the pie keeps on growing, artists will, you know, sort of naturally see that tailwind to their benefit and be making more and more and more money. And you also have price increases that have started to come in in certain places. So that's also going to benefit artists. So, you know, 10 years down the line, I think more recently we've, we've seen this trend that that people realize it's not, it's not Spotify's fault that some of these artists are not making enough money. And Daniel, like, has actually been pretty, pretty vocal about this in terms of what the new business looks like. But yeah, 10 years down the line, I don't think we're going to be seeing much of this because people are going to be much more educated on how the business works and what the reality is, right?

Right. And it's just a tool for you to be heard. It's not like, oh, I just create something so I upload it and I just deserve to make money. I mean, there's no free lunch out there. And the royalty split gets a lot of publicity. But if you sign with a big label, I think the average artists get something. like 10% of the royalty stream and 90% goes to the, goes to the big label because that, you know,

historically the, the, the, the artist makes money with touring. But if you're an independent producer, if you own your own master, or you are working with a modern digital label like believe, who takes, you know, between five and 10% cut of royalties or whatever you earn, whatever they can help you generate, then your payout as a percentage is the maximum amount. So without a label in the way, if you just upload direct, you're going to get the full, I don't know,

as sleep well is it 70%. And if you are owned by a label, the label is going to determine, your contract is going to determine what percentage you get of that. So a lot of the complaining that's done is not at the fault of the streaming company. It's at the fault of the contract that the musician has. with the music label. Because the music label is the one who decides how much you get, not Spotify.

So I think paying out two thirds in general is kind of a gross profit is, is extremely fair because it's, I mean, to pay 30% for something that wouldn't be accessible otherwise is not, I don't think of, I don't think that's unfair. But when you start adding up all these people in the middle that are taking their cut, I can, I can see how it seems. You know, like it seems unfair in a way, but I think to Sleep's point, we're going to look up and the artists are going to realize that they have a lot more, there's a lot more to do than just stream music and play concerts. There's a lot more avenues to make money in a digital world when the industry is kind of fully moved online. It's just going to be, streaming is just going to be a way for you to build your brand. and your brand is going to have more value than touring. So the value to be unlocked is, yeah, and look, you're going to make more money streaming in general because music is going to be more part of, I think, of the internet.

There's going to be music popping up in more places than ever before, and you'll get paid on that. But the real value creation opportunity for an artist of any size is not necessarily increasing the number of streams per se, but it's using the using, streaming to identify your super fan and then finding other ways to monetize your super fan. I think that's the direction that, you know, that's from the business side of what I think often gets missed and why the, you know, why Spotify and YouTube and TikTok and Peloton and even Apple Music to some degree are really powerful tools for the musician is not just about

streaming. It's about finding other ways to make money with your brand. Yeah, that's such a good point. And I'll just add one last quick thing thought there. I think a lot of people forget about a big characteristic of streaming. And us finance people can probably have an easier time understanding this. But sometimes you'll see most people complaining with the specific payouts, maybe like I made X amount of money in a month or in a year or something like that. But what sometimes gets lost upon that is that this is basically a perpetual revenue stream, right? So like if you, you almost have to think about it on a present value basis, right? Because yeah, you're you can make, you can spend $10,000 making an album and promoting it, et cetera.

And then I don't know, you get, you maybe get $500 or $1,000 in, in, you can make, you can make an album. income if it if things go decently well but that's basically uh you know a perpetuity right so it's it's going to be a nice revenue stream that you don't basically don't have to do anything about it once it's put out i mean you'll promote it when it comes out etc but but you know five years down the line that's probably going to still be making money and you won't have to be moving a single finger to to maintain that right so that's a pretty good deal for for many artists Thank you for your insights on streaming. I want to come back to the great plan.

Daniel Eck has to build a creator and middle class and enable them with Spotify's tools. Streaming can't be the only source of income for this class. So what is other initiatives Spotify has to enable this middle class? I think advertising is an interesting keyword. tipping NFTs and banking, digital concerts and concert planning are some of the ideas that are interesting. Maybe you want to go in detail on this. You know, we've, I've, yeah, go ahead, go ahead.

No, I just, and I've also tried to brainstorm, you know, it's hard because it's like saying, well, what, what direction? If you go back 10 years or 15 years and you say, well, what kind of business models are going to be built on the internet? Well, you know, there was a time in history when people just, they maybe could envision you ordering pizza on the internet, but it didn't go much further than that, especially the financial community. You know, they couldn't have envisioned the hundreds of millions of different business models that the internet is unlocked or that the iPhone is unlocked, for example. It's like saying, well, what are the possibilities with the iPhone? Well, there's a lot of business models that can be built. And I think it's just the creativity, we're just in such an early stage. I mean, just think about, like, if you've never had an interaction,

if you've never had interaction with your fans outside of a concert, and even that, I would argue, is not real interaction. That's just kind of from the stage. But real interaction with your, if you've never really had, I can't think of another industry where you have so much engagement and the artist means so much to the fan, but there's just no engagement and nothing is, there's no really monetization path.

And so some of the stuff that's done recently, I, you know, I know that who there was a, who's the famous, there's some, I mean, there's, there's, there's sponsorship deals, which are probably the lowest hanging fruit out there where, like I'd mentioned, the Bruce Springsteen and Jeep, partnership that, you know, over the Super Bowl or whatever, I think there was a little bit of a mess because he got a DUI or something a week afterwards, they had to pull the advertisement. But, you know, there's, there's, you know, artists are promoting like certain drinks or whatever, but I think you're going to see, you know, anytime you can interact with your

fan base and you start to come up with the prior projects that are important to you, whether they're non-profit or for-profit or related or even not related to the music or just related to the essence of the tribe. you represent. So listening to a fan, listening to a song or listening, being a super fan is about really being a part of a tribe. And what does that unlock? It's kind of, I could, I could see almost anything being sold. But I think in the interim, in the, in the beginning, it's going to be simple things like advanced merchandise or, or drinks. Like, you know, who is the rapper famous for vitamin water, his partnership with vitamin water?

You know, five years ago, 50 cent. Yeah, I mean, I think you'll probably see stuff like that, sponsorship deals and more localized concerts and a pre-album party, pre-album access, situations where you get to log in and help an artist screen and decide which song to put it on an album, see how they're living their life in a day, you know, ask them anything type questions, what's your favorite pair of sneakers? like, oh, yeah, and then next thing you know, the super fans are wearing those sneakers or whatever. Look at Kanye. Kanye apparently is a billionaire, and he's not a billionaire because of streaming. He's a billionaire because he's learned how to monetize his brand.

His brand is super powerful, and it's not only that he was married to Kim Kardashian in that thing, but he has clothing lines. He has so many entrepreneurial endeavors from gospel music to all kinds of stuff that he does, that he's really been able to leverage that super fan base. So I hate to sound kind of pie in the sky here, but it's just, you know, the sky's a limit on what you could do if you've never really been able to interact with your fan base before beyond just a concert. Yeah.

And I mean, we've seen, it does sound pie in the sky, Jeremy, but we've also seen some evidence of this already in terms of Spotify testing these things out. They hosted a couple of online concerts a few months ago. I think Black Keys was one. And for $15, you would be able to watch them play a live concert on a specific time frame. And I think these are things that they're going to keep on testing. It looks like they're also looking into actual live physical concerts as well, which they actually have some experience. on rap caviar in the past has hosted multiple concerts, Spotify themselves as well. And I think Green Room also comes into play here, and it's a big reason for the acquisition.

The way that I think about it is it's eventually going to be a pretty important platform for artists to engage with their super fans. And you mentioned some of this, but yeah, like listening parties are. or an example, you know, Q&A and actually having conversations with some of your biggest fans. You could have some of these be ticketed events as well. So you get yet more monetization on top of that. And everybody benefits, obviously, the artist with connecting with their fans. The fans get to have a better experience. And it's, I mean, it's probably the most natural place to do this because you already,

you already have such as an immense brand recognition with both the fans as well as the artists that they know Spotify is probably one of the biggest contributors to their life as an artist. So it's only natural for them to stay inside of that ecosystem and pursue some of these engagement initiatives. Yeah. And I was thinking about, I remember I was thinking about Travis Scott, who's one of the top artists today, musicians today, and rapper. And, you know, just looking here, one of my, one of my, Travis Scott previews new, new music in Spotify commercial. So he's previewing, he's basically, he's sharing new music that's never been, that he's

never shared before. And it's being pre, you know, it's being, it's coming exclusively into a Spotify commercial. So it's just all kinds of stuff. stuff. I mean, it's just whatever you, you can kind of think of. Travis Scott also did a virtual commercial inside of a video game. So I think it's, you know, it's, we're just, it's just in the early days of thinking about, I mean, these are creative people. And there's a lot of creative people behind creative people. There's also business people. And it's also very competitive. And I can't even imagine all the, all the ways that you could, you know, potentially make money. I mean,

And I think what's changing is you don't necessarily have to be a top 1% musician to find a way to make a living, per se. And I think what Daniel Eck means by that is not necessarily from streaming, but even if you have, I don't know, 20,000 fans, you don't need to have millions and millions of fans. But if you can think of a creative way to monetize those 20 fans, because you can find something that everybody has in common, it's a common interest where you can profit from that. I mean, look, if people can go on Instagram and have, you know, 30, 40,000 followers and be an influencer and sell like just house, like homeware, then an artist with 20 or 30,000 fans can find a way to make more money than they've probably been able to make before on, you know, with their music through through these tools. It's just, in a way, it's kind of like what's been done in Instagram.

I'm only in with music. Followed by this, I think you don't have exact answer on this. But if you observe this, I have the feeling with Spotify is building an ecosystem here. And how much control can they get about this ecosystem or how much, how they can position, how Spotify can position itself in this ecosystem that it profits from the revenue streams coming through it. 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. So maybe for the end, let's try to boil it down as an investor and to think about the opportunity of us. Jeremy, in the last talk you gave the idea of a triple opportunity.

Is it still your take? I mean, yeah, one way to look at it is just the penetration of the addressable market for premium subscribers. Like I said, it's, you know, we think they have somewhere between three and four percent of premium premium subs, three or four percent of the addressable market in premium and maybe between eight and nine percent in total subscribers of the addressable market X China. and there is an opportunity. Daniel Legg talks about their goal of getting to a billion plus getting to a billion. These guys have the biggest market share. So even if they got one third, even if one third of the addressable market was a subscriber, turned into subscribers of Spotify, even on the freemium model, that would be like,

you know, something like 1.3 to 1.4 billion subscribers. And then historically, between 40 and 45% of those freemium subscribers convert to or are premium subscribers. So that's more or less how you get to, you know, someday a premium penetration rate that's, you know, in the hundreds of millions. What that could be worth? Well, it depends on the engagement. But if you look at something, you know, how much maybe a Netflix earns or how many, how much, you know, other subscription services earn per sub and mature markets and try to extrapolate a version of that. I think the opportunity is in the tens of billions, as far as gross profit, in the tens of billions greater than where they are today.

I mean, like I said earlier, they earn about 50, currently, they only earn about 50 cents a month and gross profit per per subscriber. and that's total subscribers, but it doesn't seem like very much relative to the value that they offer for every subscriber, so even the freemium subscribers. So, yeah, you can go down the list. I mean, podcast advertising is still in its very early emphasis, and that drops straight to the bottom line. I mean, the incremental growth that they're seeing in podcast advertising is 75 plus percent gross margin.

I mean, the infrastructure is already built out. So when they grow, it just kind of drops right to gross profit. But if it's, depending on what's split with the labels and how that negotiation moves forward. But Spotify for artists, the two-sided marketplace, you know, the other little incremental opportunities to sell data maybe. But the bigger picture is probably just the competition with radio and taking more market share from radio and the conversion of premium to premium subs. Oh, and by the way, the new win with Apple, I think, is a big deal.

they've talked about how if they could only be able to subscribe, they could only have a link to allow people to subscribe directly within the app, that it would reduce churn quite a bit. And so now they'll be able to get that with the new Apple rules in the app store that apply to them starting at the beginning of the year. So all that is helpful. So how big could it be? I mean, it seems like we're in a very early days.

And I see, you know, it could be, you know, Daniel Eck talks about the company, you know, being, you know, five to seven X bigger within what he's willing and able to talk about publicly and what they can see today. And if you apply, I mean, if you just multiply that out, it's you get to 60, 70 billion in revenue and maybe a 35% gross margin. It's a much, much bigger company than it is today. So, yeah, sure, a double. I could also see, you know, over a long enough period of time, a tin bagger. I don't think that's out of the question at all. It's a 40, 42 billion enterprise value, a 40 billion enterprise value business. It just isn't that big relative to the size of the opportunity and where they are.

Do you agree or disagree, Sleepwell? That's, I mean, that's a very similar line of thought when I try to think about the valuation, and call it 10 years down the road. Another very simplistic way of thinking about it for me is I try to look at just the kind of the entire universe of technology, large technology companies that's out there. And I can't really see any other company that has some of the attributes that we're seeing here in terms of being the largest, the only pure play. it's scaled as well.

It has a highly engaged user base. It has an actual real shot of getting to a billion plus users. And it's basically going for a 40-ish billion enterprise value. And I don't think there's many other companies like that that are out there. And again, going back to sort of the metrics that we're focusing on, I think that the user, their growth and the engagement and the innovation those are the three more most important ones for me and and if we if we get to where management thinks they can they can get to in the next 10 years the stock price is basically going to work itself out do you have anything to add for the end of our

interview anything we haven't thought about in context of Spotify and a music market I mean, yeah, there's probably a lot of other topics. Blockchain, for example, payments, the partnership with DM, being on the DM association, part of the DM association and centralized kind of blockchain and the, and the impact that a stable, stable coin will have on their ability to do, to, you know, to do business in parts of the world where it was prohibitive otherwise. And yeah, there's, there's a lot of other facets of it. What is the impact in short? Well, you don't need a bank. I mean, in a perfect world, if they're using a stable coin or a crypto to make a payment, you get to circumvent the bank in a lot of these countries and also manages payments

in a really efficient way that it isn't done. I think there's a lot of other pieces and that just greater, as the company evolves, the company just gets better and better. And it's not really core to the thesis today, but there's just so many little, little optionality elements to the story that outside of just the core business of, you know, just growing subscriptions that, yeah, it just is a, it's a fascinating, it's a rare case where you just have so many ways you can win. And the downside at, I don't know, three and a half, four times next year's revenue on a, in a U.S.

dollar terms, just seems real, you know, it seems like a very different valuation proposition than a lot of large tech companies. So what optionalities? Use the app. Everybody should use the app. I think people that are critical of it don't necessarily use the app. And if they use the app, they've just used it to listen to a playlist or something. But I encourage people to really play with the app, really get into podcasting.

really use podcasting as a tool to do research on whatever topic, really get into the recommendations and just start playing around with it. They're going to be introducing e-books before the end of the year. I'm really excited to see what that looks like and try to participate in, you know, try to buy a concert ticket. I bought a concert ticket last month, a small band, a small group that I love that happens to be coming to Europe in March next year. So buy a concert ticket, you know, click on your favorite artists and look for the next time they're going to be playing in your city and buy a ticket and use the app to learn more about your favorite artists.

There's a section on there that talks about the artists where they, you know, have a history of how the band got together and just kind of play with the app and really get into it. And I think comparing that to what else is out there, it helps. to somebody to understand like what they're you know what this is compared to you know what this is and what the bigger opportunity is and monetizing it sleep do you have anything to that i think the only other thing i would add that i thought was super interesting was that they announced a one billion dollar buyback recently which is not that that common for uh for a company at this at this stage but they're overcapitalized and they've been pretty vocal with the fact that they think their stock is cheap.

The last time they did something like this a couple of years ago, they bought back a bunch of stock in the in the 130s. So it proved to be pretty timely. And we know Daniel Legg has bought warrants in the past as well from his own pocket. So management is thinking about the stock price as attractive here. If that's indicative of anything, I think it's interesting. Yeah, they've got some like three and a half billion of cash. I mean, it's more than enough.

And Paul Volcker, the CFO talked about it on the last, on the last, he did a, they did a Bank of America call, so sell side call. And he talked about their priorities for capital allocation. And the buyback is kind of the third priority. But it is nonetheless just a question of pure opportunity. They really believe their stock is undervalued. And I do as well. And I think if, hey, if they fully invested, they're investing like a billion a year in R&D. So if they're fully invested in R&D and they're fully invested in R&D and they're fully invested in,

and podcast content or whatnot. And then they happen to have a billion plus left over of that three and a half. And their stock is trading at what they believe to be, you know, a 25 cent dollar. Why not buy a couple hundred to two, three hundred million worth of it. And, you know, it's, it's an asset they know pretty well. So I think it's great. And thank you very much for coming to good investing talks and having this great talk about Spotify. Yeah.

Yeah, thank you for having us. Thanks for having us, still in. This is fun. Great insights, and thank you for the audience for listening to this talk. And hope to see you the next episode, and for this, bye, bye, bye. 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.

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