3 Hurdles that Spotify (SPOT) Must Scale to Unlock Value for Its Investors

Spotify Technology (NYSE: SPOT) came to limelight on Wall Street earlier this month after it took the unconventional route of direct listing to get its stock on the market. Many people have weighed in Spotify’s value considering the fact that it stock traded between $37.50 and $125 in 2017. Nonetheless, not many people were surprised when Spotify’s stock debuted at $165.90, almost 26% from the consensus reference price of $132 that the NYSE set ahead of the listing. The stock has managed to hold on to its bullish debut as it continues to trade up with a 6.34% uptrend two week after its debut.

Where is Spotify headed?

Wall Street analysts have been doing a fairly decent job of predicting where the music streaming service might be likely headed. Analysts at RBC Capital are optimistic about the prospects of the stock, they believe that the stock is probably undervalued at a valuation of $125 and it has huge growth potentials. Mark Mahaney from RBC Capital observes that “very high global aided brand awareness, relatively high customer satisfaction scores and superior data-driven personalization all combine to help Spotify maintain its leadership position,”

John Egbert, an analyst at Stifel posits that Spotify is probably the third best value deal on Wall Street behind Amazon and Netflix. He predicts a $180 trading price on the stock with an expectation that the firm has the potential to double its user base. In his words, “We think Spotify’s market leadership, emerging markets exposure, favorable user demographics, the secular shift to mobile and digital services, as well as the near-universal appreciation of music, will support Spotify’s growth for years to come.”

However, all the bullish vibes surrounding Spotify won’t automatically translate into growth and profitability until the company is able to work out some pressing concerns around the fundamentals of its business. Below are three main hurdles that Spotify must jump in order to unlock value for its investors.

Content is king, Spotify doesn’t have the crown

The first hurdle that Spotify need to jump is the fact that it doesn’t own or have much control over the songs on its platform. Spotify’s current business model sees its licensing music from the Big 3 record labels; namely, Warner Music, Sony Music, and Universal Music – sorry, many “independent” artists are also on the payroll of these trio. The worst part is that the Big 3 have a “triopoly” of sorts in which Spotify must have practically the same terms of service for them; hence, it can’t strongarm any of them into betting better rates.

Unlike Netflix and Amazon, that operate in the video streaming segment, Spotify can’t just wake up and decide to start creating original content. Creating original video content as a series or movie is different from creating original content for movies. The music stars are already signed on to record labels, signing upcoming stars will sort of turn Spotify into another record label, and there’s no guarantee that the new signings will achieve any amount of success in the market.

Spotify must find creative ways to break the hold of the Big 3, and more importantly, it must find a way to negotiate better licensing terms going forward.

Spotify’s competition is ruthless

Spotify is a major player in the global music industry, the firm has made a name for itself despite its humble Swedish beginnings in 2006, and it currently has more than 70 million users. Nonetheless, it might be myopic to ignore the fact that Spotify is competing with Apple Music, Amazon Music, and Google Play Music in a classic case of swimming with the sharks.

To start with, music streaming is a value-added service for Apple, Amazon and Google; hence, they can afford to run their music streaming service at low margins or even at a loss, without impacting their bottom lines significantly. Spotify’s core and only business however is music streaming; hence, the only way it can stay in business is to constantly find ways to increase its revenue and profit margins – sadly, the firm is yet to turn a profit.

Spotify needs a stronger value proposition

Spotify needs to create a brand messaging of a unique selling proposition that sets it apart from rivals while simultaneously helping users retail their loyalty to its brand and product. The trio of Amazon, Google, and Apple will find it much easier and cheaper to acquire new customers and possibly poach some of Spotify’s customers. Apple has Apple Music, and if you have an iPhone, iPad, or Apple Watch or MacBook, you probably don’t have a compelling reason to use Spotify, if you use an Android device, you also don’t have much of a compelling reason to use Spotify. If you shop on Amazon with Amazon Prime, you can get Amazon Music, Video and other perks as part of a bundled service; hence, you don’t really need Spotify.