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Look at the future of Tencent music through Spotify

via:博客园     time:2018/7/10 21:39:09     readed:470


This article is reproduced from the public numbe

In recent days, in addition to the listing of Hong Kong stock (HK:01810), another heavy event is to be split into the US market by Tencent music.

So far, Tencent Music has not disclosed the prospectus. However, there have been a large number of institutions at home and abroad.

Unlike Xiaomi, this

It is said that the origin of the valuation of US $30 billion is generated by reference to Spotify.

Some investors believe that Tencent music has chosen to be listed in the US market because it can easily be priced against the standard Spotify; and, with Spotify, the Index Corp, the US investors are more likely to understand and accept the business model of Tencent music.

So, before the Tencent music prospectus is unveiled, we might as well look at the company of Spotify first to have a corresponding prejudgement on the IPO prospects of the former.

The business model is free and paid for, so far it's not profitable.

Spotify was formally launched on October 2008 in Stockholm, Sweden, and completed its IPO in the NYSE in April 2018, tenth years after its establishment.

As of July 9th, its market value reached US $31 billion 500 million, and it is the largest streaming music service platform in the world.

It is worth mentioning that in December 2017, Tencent music and Spotify reached a strategic cooperation between the two sides. Spotify owns about 9% of Tencent music entertainment.

Like most streaming operators, Spotify services are divided into two categories: free and paid.

With the Spotify free version, users can enjoy the basic services of streaming music. If you pay $9.99 a month for paid versions, users will be able to listen to music offline and enjoy an ad free experience.

put to use

So far, Spotify has done a good job in user group realisation, involving the entire user group, including free and advanced users. Reflected in revenue, its revenue increased from 1 billion 900 million euros in 2015 to about 4000000000 euros in 2017, more than double.


Moreover, the revenue of the two parts has a growth rate of about 40% in 2017.

But it is worth noting that in the long period since its establishment in 2008, the company has always been in a state of failure in advertising. Until 2017, the side changed and finally achieved a small profit.

This is very important, because the advertising support market will no longer drag on profits, making the gross gross profit margin continue to grow. This also shows that Spotify has more and more efficient resources, whether through economies of scale or in other ways.

That being said, we need to make it clear that Spotify is still a company with overall losses as of the first quarter of 2018.


In the first quarter of 2018, the total revenue of the company was 1 billion 139 million euros. However, due to the negative impact of exchange rate, the growth of 37% over the same period dropped by 11 points after adjusting the exchange rate to 26% year-on-year.


As Spotify headquarters is located in Stockholm, Sweden, and is reported in euros, the US dollar trend has affected its receivables. In the second half of 2017, the euro strengthened sharply against the US dollar, so there was a deviation from the first quarter of last year.

The company has 40% subscribers in Europe from Europe, so the impact of exchange rate can not be ignored.


But exchange rates are not the focus of our attention.

As of the first quarter of 18, Spotify subscribers reached 75 million. It is expected that this figure will increase to 79 million to 83 million in the two quarter. The company expects to harvest about 94 million subscribers by the end of this year.

Spotify is most competitive against weekly Apple Music (NASDAQ:AAPL), but the latter has only about half of Spotify subscribers.

Although it is still in a state of deficit, the Spotify operating profit margin has been improving, the first quarter of 2018 was -3.6%, higher than that of -15.4% in the same period last year. The ability to improve operating margins also provides optimistic expectations for Spotify investors.

Spotify operating expenses mainly focus on sales and marketing two items, accounting for 42.6% of the total operating cost. As Spotify continues to expand to other countries, this figure will undoubtedly be very high.

Fortunately, this growth will not last forever: practice has proved that once a firm has got a solid foothold in a country, it can start cutting spending in this field.

If so, coupled with the improved operating profit margins, it seems that these signs indicate that Spotify will eventually be profitable.

As a leader in streaming music, there is no strong moat.

Although Spotify is an undisputed leader in the field of streaming music, there is no convincing evidence to date that the company has a moat that protects it from serious competition.

Such a fact is the biggest worry for shareholders who expect sustainable returns.

As we know, NASDAQ:AAPL (NASDAQ:AAPL) and NASDAQ:AMZN's music streaming business is trying to expand its user base; and Google (NASDAQ:GOOG) has also launched new music subscription services and will be propagandize through YouTube's large-scale advertising.

Google's name is

In addition, it is worth noting that although Spotify's revenue consists of two parts, advertising and subscription, more than 91% of its revenue comes from subscribers.

Although the monthly growth in the first quarter of 2018 increased by 44%, subscribers subscribed to 30% slower than the monthly growth rate. This resulted in a 14% decline in average revenue per user (ARPU) in the first quarter.

Revenue figures are clear: today's end music consumers are still reluctant to spend a lot of money on music streams

Music licensing costs are hard to cut, and gross margins are not as good as WAL-MART's.

In terms of cost, Spotify also encountered many difficulties. The most important cost of Spotify is royalties.

Today's European and American music market presents an oligopoly of four record companies. The four largest companies are global, SONY and Warner Music, and Merlin, the representative of small brands.

The four recording companies control 90% of Spotify's available songs.

The oligopoly nature of music business makes the record companies have considerable bargaining power in negotiations with Spotify.

All the major brands are in the contract

Therefore, in essence, Spotify must take the major record companies as a system to negotiate at the same time.

In this way, Spotify's position in the value chain has been squeezed, including supplier record companies, professional musicians and the ultimate consumers.

Such industry value chain obviously restricts the increase of Spotify gross margin. In the first quarter of 2018, the gross profit margin of the company was only 25%, much higher than that of 16% in 2016, but it was still not enough to generate profits.

And, as we all know, for a star tech company, such a low gross margin is a bit unappetizing.

In this regard, we can only hope that Spotify and its peers can get better terms in the negotiations with the record makers, otherwise we can't expect high expectations of their gross margin.

You might say, this is not without precedent: Spotify managed to negotiate better terms with the record company in 2017 and raise its gross interest rate from 14% to 21%.

But it is clear that the major record companies have an important stake in Spotify, at the time of the Spotify pass, which have the power to help companies go public faster in order to avoid the terms that trigger convertible bonds and thus dilute their shares.

Therefore, when negotiating the terms in 2019, the record companies will no longer have the same incentive measures to grant Spotify more favorable terms.

The more users and more content, the higher the cost of content.

Some investors will compare Spotify with nfly Netflix (NASDAQ:NFLX).

Netflix has been losing money for many years, but it has become one of the most successful stocks in recent history, and its share price has soared 7 times in the past 3 years. Netflix continues to grow at an alarming rate, and has achieved operational and net income in the past few years, even though profits are still suppressed.

Although there are obvious similarities between the two companies, the two companies sell subscription fees of about $10 a month, while content accounts for most of their expenses.

However, video streaming companies like Netflix can pay only once for a piece of content and can be played on multiple occasions as needed; and Spotify, a music media company, has to pay a copyright fee to a record company and other music owners every time a song is played.

Therefore, the more users the Spotify has, the more content it uses, the higher the cost of its content, and the possibility of forming economies of scale.

If Spotify can't let record companies cooperate with them, then the next step is to increase the subscription price.

Netflix has been able to raise subscription prices without losing many customers. This is a strategy Spotify has not yet tried. If Spotify wants to replicate the success of Netflix, it needs to produce or possess original content.

This is a challenge for Spotify. Unfortunately, Spotify does not have the same pricing power as Netflix.

If it raises its rate to $15, the competition between apple, Google and Amazon will immediately put it at a disadvantage and inhibit the increase in Spotify subscriptions.

In fact, the three big companies can lower prices to cope with Spotify growth and exert further pressure on Spotify.

Another way to deal with it is to directly bypass the record companies and get copyright directly from the music producers. Spotify did start to get music permission directly from professional musicians who own their own music licenses.

Direct licensing deals are a way to reduce the middlemen of record companies and increase profits. The process is still in its infancy. If we want to increase the gross profit margin of Spotify, we need to expand this self licensing mode.

But this process may increase the tension between Spotify and four oligopoly records, and the record companies may threaten to withdraw their own music and weaken the Spotify's competitiveness in front of their opponents.

The biggest advantage of Spotify lies in a large enough market.

Fortunately, Spotify also has the advantage that competitors do not have.

For example, compared to Apple Music, Spotify is not attached to a technology giant, and the impression of a professional musician has also made it more popular with young people and big V.

The drawback of independence is that Spotify can not get a lot of investment from its parent company. In the two tier market, investors' support for Spotify is conditional. If it fails to generate sustainable profits, these investors will leave.

This makes Spotify not only good at streaming music, but also on strengthening social attributes.

Social functions allow users to access other people's playlists and show the user's musical tastes through a list, as well as to entertain and enhance contact with friends.

Now, each time the Spotify is used, the song groups are added to the playlist, which pop up in a friend's message and communicate with each other's favorite music.


The innovation of this mode provides imagination and expansibility for the service scope provided by streaming music companies in the future.

The biggest advantage for Spotify, a young technology company, is that its market is big enough and is growing all the time.

Recorded music sales in the United States increased by 17% to $8 billion 500 million in the United States last year, of which streaming music sales accounted for nearly 2/3 in the United States. This has made record sales the fastest growth since 23 years ago.

Is Spotify also able to double its user base, expand gross margin and generate biomass free cash flow? For such a problem, investors with different risk preferences can see wisdom from their own eyes.

Back to reality, Spotify's biggest challenge right now remains how to change its relationship with suppliers and make itself more valuable to suppliers. If this can be done, there may be a chance to become

The value of the Spotify is about 4 times the expected revenue in 2019 and 7 times the Netflix, indicating that the Spotify has not been overestimated.

In addition, the music industry's background is changing from transaction mode to demand mode, and Spotify is just the mainstay of this transformation. This industry trend also shows that young Spotify has broad room for growth.

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