Weekly readings – 24th August 2019

Spotify’s pitch to podcasters: valuable listener data

Netherlands’ Building Ages. How cool is this? It must have taken quite some time and effort to build this map.

OuiWork? The quick case for WeWork as an actually disruptive business

Apple Targets Apple TV+ Launch in November, Weighs $9.99 Price After Free Trial

Where Top US Banks Are Betting On Fintech

Manufacturers Want to Quit China for Vietnam. They’re Finding It Impossible

Apple’s New TV Strategy Might Just Work

MoviePass database exposes 161 million records. Much as I am grateful to MoviePass, perhaps it’s time for the company to be shut down

Starbucks, monetary superpower. Let me give you a notable quote to get an idea of what this article is about

Starbucks has around $1.6 billion in stored value card liabilities outstanding. This represents the sum of all physical gift cards held in customer’s wallets as well as the digital value of electronic balances held in the Starbucks Mobile App.* It amounts to ~6% of all of the company’s liabilities. 

This is a pretty incredible number. Stored value card liabilities are the money that you, oh loyal Starbucks customer, use to buy coffee. What you might not realize is that these balances  simultaneously function as a loan to Starbucks. Starbucks doesn’t pay any interest on balances held in the Starbucks app or gift cards. You, the loyal customer, are providing the company with free debt. 

Now bigger than eBay, Shopify sets its sights on Amazon

Inside India’s Messy Electric Vehicle Revolution

Spotify Earnings

Spotify reported some good results earlier today for their 2Q 2019

Important metrics all improved YoY, including user base and financial growth. Gross Margin for Premium and Ad-Supported is 27.2% and 15.8% respectively. Average Revenue Per User is 4.86 euros. Compared to the previous 2nd quarters, here is where the current one stands

Every metric’s growth, except that of Premium Subscribers and Total MAUs, slowed compared to a year ago.

In terms of Gross Margin, while that of Premium stays relatively stable, Ad-Supported’s fluctuates quarterly.

QuarterPremium Gross Margin Ad-Supported Gross Margin
Q1 201714.00%-18.00%
Q2 201724.10%13.60%
Q3 201722.90%17.00%
Q4 201726.76%21.35%
Q1 201826.00%12.70%
Q2 201826.90%16.30%
Q3 201826.10%18.60%
Q4 201827.30%22.10%
Q1 201925.90%11.10%
Q2 201927.20%15.80%

Though Average Revenue Per User does fluctuate, this quarter’s is lower than that of the previous two 2Qs. I suspect that Spotify will pursue the Netflix’s playbook by growing their user base, whether it’s Premium or Free Trial. A large user base will help make each investment in content (podcast) relatively cheaper (a fixed cost is divided by a growing denominator). A sizable base will make Spotify more attractive as a partner to content producers and advertisers. Spotify differs from Netflix in a sense that they are already offering ads while the video streamer is still true to their focus on videos.

QuarterAverage Revenue Per User
Q1 20175.46
Q2 20175.69
Q3 20175.50
Q4 20175.69
Q1 20184.72
Q2 20184.89
Q3 20184.73
Q4 20184.89
Q1 20194.71
Q2 20194.86

Disclaimer: I have Spotify stocks in my personal portfolio

Weekly readings – 30th March 2019

What even is AirBnb anymore? Questions that AirBnb will face ahead of its IPO and after.

2018 Theme Report. An informative study on the theatrical and home entertainment market environment in 2018.

How Kirkland Signature powers Costco’s success. A nice coverage on the signature private label of Costco.

2019 State of the Cloud. A framework to look at cloud businesses by folks at Bessemer Venture Partners.

The 2019 Drunk Shopping Census. An interesting piece on drunk folks’ purchase behavior. It must be tough for one to recall back the purchases made when drunk when one participates in the survey. The folks at The Hustle are good with words and sometimes have pretty good content. Give them a follow if you want daily email with overview of what happens in business and tech.

AirPods. I totally agree with the author of this post. AirPods are truly a massive success. Since I bought them last May, I have used them at least 6-7 hours a day every day. Sometimes, I don’t even feel that they are in my ears. Convenience goes up significantly. The sound may be not as good as power users of wireless headphones would want, but it is good enough for average users like myself. The design is just right. You can exercise without worrying about losing them. (Follow Horace Deliu if you are a fan of micro-mobility and Apple)

The State of Online Travel Agencies – 2019. A good overview of Online Travel Agencies’ performance last year.

How Spotify & Discover Weekly Earns Me $400 / Month. A specific and personal example of how Spotify helps obscure artists get paid for their work. This is why I love Spotify.

Apple’s abuse of power

When I jogged down my thought on Senator Warren’s plan to break up Apple, I was wrong when I put:

 I also fail to recall an instance where Apple released a certain product/service and abused its power to favor the product/service.

I failed indeed as it turned out, Apple has, to Spotify.

Spotify has filed an antitrust complaint against Apple, citing its abuse of power to favor its Apple Music. It also launched a website to detail the abusive power of the iPhone maker.

I am still of opinion that there are expenses involved in running AppStore such as security patches, payment, language translation, fraud prevention, and so on. These expenses can be considered justification of the 30% revenue tax imposed by Apple, though it’s not unreasonable to say that it’s a bit too high. Nonetheless, it creates unfair advantages for Apple when the tax is imposed on apps that compete with Apple’s own such as Apple Music as in the case of Spotify. Worse, Apple threw restrictions at Spotify in order to reduce competition for Apple Music as detailed in the website above.

I am genuinely disappointed in myself for the inaccurate statement I made. I still think Senator Warren’s call to break up Apple from AppStore is impractical and over-reaching. However, they do need to answer for the abusive behavior like they have shown to Spotify and should take actions in similar cases moving forward to ensure a fair competition to apps makers.

Lesson learned for me.

Thoughts on Spotify

Spotify’s business model has been straightforward. Take music from the creators, let users have frictionless access to the content and generate revenue by either ads or premium subscriptions. The company delivers music in an appealing and user-friendly manner to the point that listeners agree to pay a premium for access every month. On the other side, Spotify pays royalties back to artists or labels every time a song is consumed. As the user base grows, Spotify generates revenue from advertisers which want to convey their marketing messages to an engaged audience.

Yesterday, the company announced their latest quarterly earnings and I found the report interesting. First, the number of subscribers. Both Premium Subscribers and Ad-supported MAUs increased.

Source: Spotify Data

There seems to be a seasonality in the subscriber acquisition. Subscriber acquisition seems to pick up more in Q2 and Q4 than in Q1 and Q3. The increase in premium subscribers in 2018 slows down, compared to the pace in 2017

Meanwhile, the Average Revenue Per User (ARPU) has been on decline.

Source: Spotify Data

With regard to revenue, it seems that the increase in subscriber count outweighs the decline in ARPU as revenue is on the rise

Source: Spotify Data

Both Premium and Ad-Supported revenues seem to be affected by seasonality. Ad-Supported revenue growth fluctuates more than Premium revenue growth. In 2018, revenue from ads grew faster than subscription-based revenue.

Source: Spotify Data

Gross Margin for both revenue streams went up with Ad-Supported gross margin growing at a faster clip in the last four quarters

Source: Spotify Data

In Q4 2018, Spotify became profitable for the first time. Free cash flow also reached the all-time high

Source: Spotify Data

Based on the numbers, it seems that everything is going in the right direction for Spotify. User base is expanding, revenue is going up, free cash flow is growing and the company becomes profitable for the first time. Even though ARPU has been declining, it’s understandable as many users were acquired on a discount. However, it’s necessary to maintain the network effect and grow the user base to attract advertisers.

As Spotify doesn’t own the majority of their content and it still has to pay a small royalty for content enjoyed by free users, Spotify faces two significant risks. First, it relies too much on the labels that can take their content elsewhere. Second, paying for content while generating zero revenue from free users might hurt the company’s margin. Hence, it needs original content. Already featuring original series with Amy Schumer and Guy Raz, the company now seems to switch its focus on another source of originals: podcasts.

During the earning call, Spotify announced the acquisitions of Gimlet Media and Anchor. The former is a podcast production company and the latter is a DIY tool that allows publishers to produce and broadcast original podcasts. In the call, CEO of Spotify mentioned that over time 20% of content on Spotify will be non-music and that several potential acquisitions which the company is considering in 2019 will all be related to podcasts.

The acquisitions and focus on podcasts make sense in terms of original content and monetization. Podcasts are gaining in popularity as a form of engaging content. Media outlets have podcasts. Companies have podcasts. Celebrities have podcasts. As an audio platform, Spotify certainly cannot afford to sit this one out. Having podcasts, in addition to music, makes Spotify more appealing. During the earning call, Daniel Elk, CEO of Spotify, hailed podcasts’ positive impact on the engagement of users on the platform. He indicated that podcasts could lure users who wouldn’t have signed up for Spotify. Plus, it’s definitely easier to have access to different content forms on one app than multiple apps. And what’s the better and faster way to be able to produce content than to acquire a proven production firm?

There is also the monetization piece. One revolutionary aspect of Spotify is to help obscure and less-known artists to get their creativity out to the world and get paid. The more their songs are listened through Spotify, especially the Discovery, the more dollars the artists receive. Spotify is in a position to do the same for podcast creators. According to a blog post by Anchor, nearly all podcast advertising concentrates in the top 1% of podcasts. The other 99% have to hope that their episodes are downloaded to the tunes of thousands to be able to attract advertisers. If Spotify can help podcasts generate revenue for their work in the same way as it has done for artists, Spotify can become the Spotify for podcasts and stand a higher chance of securing exclusives and originals in the future.

All in all, I think Spotify is going in the right direction. Securing key capabilities through acquisitions in a key area such as podcasts is crucial to future growth.